10-Q 1 trup-20220930.htm 10-Q trup-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-36537
TRUPANION, INC.
(Exact name of registrant as specified in its charter)
Delaware83-0480694
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
6100 4th Avenue S, Suite 400
Seattle, Washington98108
(855) 727 - 9079
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $0.00001 par value per shareTRUPThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesNo
As of October 28, 2022, there were approximately 40,883,654 shares of the registrant’s common stock outstanding.



TRUPANION, INC.
TABLE OF CONTENTS



Note About Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended (Securities Act). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “target,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan” and “expect,” and similar expressions that convey uncertainty of future events or outcomes, are intended to identify forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II. Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law.
Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our” and similar references refer to Trupanion, Inc. and its subsidiaries taken as a whole.






PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRUPANION, INC.
Consolidated Statements of Operations
(in thousands, except share data)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenue$233,760 $181,667 $659,170 $504,612 
Cost of revenue:
Veterinary invoice expense(1)
171,112 125,058 473,654 353,210 
Other cost of revenue(1)
32,589 28,443 96,980 77,591 
Total cost of revenue203,701 153,501 570,634 430,801 
Operating expenses:
Technology and development(1)
6,553 4,391 18,178 12,201 
General and administrative(1)
10,314 8,246 28,907 22,897 
New pet acquisition expense(1)
22,434 19,708 67,043 58,802 
Depreciation and amortization2,600 2,944 8,024 9,195 
Total operating expenses41,901 35,289 122,152 103,095 
Gain (loss) from investment in joint venture(57)(69)(168)(149)
Operating loss(11,899)(7,192)(33,784)(29,433)
Interest expense1,408  2,680 1 
Other income, net(889)(61)(1,568)(222)
Loss before income taxes(12,418)(7,131)(34,896)(29,212)
Income tax expense (benefit)496 (312)491 (724)
Net loss$(12,914)$(6,819)$(35,387)$(28,488)
Net loss per share:
Basic and diluted$(0.32)$(0.17)$(0.87)$(0.71)
Weighted average shares of common stock outstanding:
Basic and diluted40,799,819 40,283,818 40,707,677 40,044,518 
(1)Includes stock-based compensation expense as follows:
Veterinary invoice expense$998 $769 $3,232 $3,740 
Other cost of revenue474 542 1,906 2,029 
Technology and development1,184 749 3,193 2,213 
General and administrative3,792 2,271 9,281 6,412 
New pet acquisition expense2,195 2,112 7,214 7,024 

See accompanying notes to the consolidated financial statements.
1


TRUPANION, INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net loss$(12,914)$(6,819)$(35,387)$(28,488)
Other comprehensive income (loss):
Foreign currency translation adjustments(3,946)(1,800)(8,193)(808)
Net unrealized gain (loss) on available-for-sale debt securities(900)(2)(901)(2)
Other comprehensive income (loss), net of taxes(4,846)(1,802)(9,094)(810)
Comprehensive loss$(17,760)$(8,621)$(44,481)$(29,298)

See accompanying notes to the consolidated financial statements.
2


TRUPANION, INC.
Consolidated Balance Sheets
(in thousands, except share data)
September 30, 2022December 31, 2021
Assets(unaudited)
Current assets:
Cash and cash equivalents$85,506 $87,400 
Short-term investments97,438 126,012 
Accounts and other receivables, net of allowance for doubtful accounts of $384 at September 30, 2022 and $342 at December 31, 2021
224,082 165,217 
Prepaid expenses and other assets14,802 12,325 
Total current assets421,828 390,954 
Restricted cash13,477 13,469 
Long-term investments, at fair value55,119 7,061 
Property and equipment, net87,066 77,950 
Intangible assets, net19,327 22,663 
Other long-term assets21,553 17,776 
Goodwill29,526 32,709 
Total assets$647,896 $562,582 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$7,627 $8,952 
Accrued liabilities and other current liabilities31,112 28,162 
Reserve for veterinary invoices39,542 39,671 
Deferred revenue202,504 146,911 
Long-term debt - current portion600  
Total current liabilities281,385 223,696 
Long-term debt53,560  
Deferred tax liabilities2,601 2,827 
Other liabilities4,612 3,859 
Total liabilities342,158 230,382 
Stockholders’ equity:
Common stock: $0.00001 par value per share, 100,000,000 shares authorized; 41,901,548 and 40,873,362 issued and outstanding at September 30, 2022; 41,408,350 and 40,475,185 shares issued and outstanding at December 31, 2021
  
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized; no shares issued and outstanding
  
Additional paid-in capital490,566 466,792 
Accumulated other comprehensive income (loss)(6,017)3,077 
Accumulated deficit(162,277)(126,890)
Treasury stock, at cost: 1,028,186 shares at September 30, 2022 and 933,165 shares at December 31, 2021
(16,534)(10,779)
Total stockholders’ equity 305,738 332,200 
Total liabilities and stockholders’ equity$647,896 $562,582 

See accompanying notes to the consolidated financial statements.
3



Trupanion, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
(unaudited)
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury StockTotal Stockholders' Equity
SharesAmount
Balance at July 1, 202240,745,298 $ $481,818 $(149,363)$(1,171)$(16,530)$314,754 
Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings128,126 — (437)— — — (437)
Stock-based compensation expense— — 9,185 — — — 9,185 
Repurchases of common stock(62)(4)(4)
Other comprehensive income (loss)— — — — (4,846)— (4,846)
Net income (loss)— — — (12,914)— — (12,914)
Balance at September 30, 202240,873,362 $ $490,566 $(162,277)$(6,017)$(16,534)$305,738 
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury StockTotal Stockholders' Equity
SharesAmount
Balance at July 1, 202140,231,055 $ $453,950 $(113,029)$4,063 $(10,779)$334,205 
Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings132,720 — (224)— — — (224)
Stock-based compensation expense— — 6,613 — — — 6,613 
Other comprehensive income (loss)— — — — (1,802)— (1,802)
Net income (loss)— — — (6,819)— — (6,819)
Balance at September 30, 202140,363,775 $ $460,339 $(119,848)$2,261 $(10,779)$331,973 

See accompanying notes to the consolidated financial statements.
4


Trupanion, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
(unaudited)
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury StockTotal Stockholders' Equity
SharesAmount
Balance at January 1, 202240,475,185 $ $466,792 $(126,890)$3,077 $(10,779)$332,200 
Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings493,198 — (2,196)— — — (2,196)
Stock-based compensation expense— — 25,970 — — — 25,970 
Repurchases of common stock(95,021)(5,755)(5,755)
Other comprehensive income (loss)— — — — (9,094)— (9,094)
Net income (loss)— — — (35,387)— — (35,387)
Balance at September 30, 202240,873,362 $ $490,566 $(162,277)$(6,017)$(16,534)$305,738 
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Treasury StockTotal Stockholders' Equity
SharesAmount
Balance at January 1, 202139,450,807 $ $439,007 $(91,360)$3,071 $(10,779)$339,939 
Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings912,968 — (549)— — — (549)
Stock-based compensation expense— — 21,881 — — — 21,881 
Other comprehensive income (loss)— — — — (810)— (810)
Net income (loss)— — — (28,488)— — (28,488)
Balance at September 30, 202140,363,775 $ $460,339 $(119,848)$2,261 $(10,779)$331,973 

See accompanying notes to the consolidated financial statements.
5



TRUPANION, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30,
20222021
Operating activities
Net loss$(35,387)$(28,488)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Depreciation and amortization8,024 9,195 
Stock-based compensation expense24,826 21,418 
Other, net28 (931)
Changes in operating assets and liabilities:
Accounts and other receivables(58,948)(58,773)
Prepaid expenses and other assets(4,420)(1,922)
Accounts payable, accrued liabilities, and other liabilities748 4,353 
Reserve for veterinary invoices63 9,854 
Deferred revenue56,047 47,596 
Net cash (used in) provided by operating activities(9,019)2,302 
Investing activities
Purchases of investment securities(125,660)(62,288)
Maturities and sales of investment securities104,492 39,066 
Cash paid in business acquisition, net of cash acquired(2,755) 
Purchases of property and equipment(11,610)(8,537)
Other(1,431)(48)
Net cash used in investing activities(36,964)(31,807)
Financing activities
Proceeds from debt financing, net of financing fees54,312  
Repayments of debt(300) 
Repurchases of common stock(5,755) 
Proceeds from exercise of stock options1,584 3,056 
Shares withheld to satisfy tax withholding(3,780)(3,730)
Net cash provided by (used in) financing activities46,061 (674)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net(1,964)(53)
Net change in cash, cash equivalents, and restricted cash(1,886)(30,232)
Cash, cash equivalents, and restricted cash at beginning of period100,869 146,197 
Cash, cash equivalents, and restricted cash at end of period$98,983 $115,965 
Supplemental disclosures
Noncash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities$1,838 $537 
See accompanying notes to the consolidated financial statements.
6


TRUPANION, INC.
Notes to the Consolidated Financial Statements (unaudited)
1. Nature of Operations and Significant Accounting Policies
Description of Business and Basis of Presentation
Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the "Company") provides medical insurance for cats and dogs throughout the United States, Canada, Europe, Puerto Rico, and Australia. The Company's data-driven, vertically-integrated approach enables the Company to provide pet owners with products that the Company believes are the highest value medical insurance, priced specifically for each pet’s unique characteristics.
The financial data as of December 31, 2021 was derived from the Company's audited consolidated financial statements. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and, in management's opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations, comprehensive income (loss), stockholders' equity and cash flows for the interim periods. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on February 17, 2022 (the 2021 10-K). The Company's accounting policies are described in Note 1 to the audited financial statements included in the 2021 10-K. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from such estimates. See Note 1 to the audited financial statements included in the 2021 10-K for additional discussion of these estimates and assumptions.

2. Net Income (Loss) per Share
Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated using the weighted average number of shares of common stock plus, when dilutive, potential shares of common stock outstanding using the treasury-stock method. Potential shares of common stock outstanding include stock options and restricted stock units.
The following potentially dilutive equity securities were not included in the diluted earnings per share of common stock calculation because they would have had an antidilutive effect:
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Stock options679,889 843,452 679,889 843,452 
Restricted stock units1,167,569 1,138,709 1,167,569 1,138,709 


7



3. Investments
The amortized cost, gross unrealized holding gains and losses, and estimates of fair value of long-term and short-term investments by major security type and class of security were as follows as of September 30, 2022 and December 31, 2021 (in thousands):
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
As of September 30, 2022
Long-term investments:
Available-for-Sale Investments
Mortgage-backed securities and collateralized mortgage obligations$4,121 $ $(92)$4,029 
Other asset-backed securities4,928  (65)4,863 
Corporate bonds19,960  (437)19,523 
Foreign deposits6,862   6,862 
Municipal bond1,000  (5)995 
US Treasury securities19,124  (277)18,847 
$55,995 $ $(876)$55,119 
Short-term investments:
Available-for-Sale Investments
US Treasury securities$993 $ $(9)$984 
Corporate bonds388  (4)384 
$1,381 $ $(13)$1,368 
Held-to-Maturity Investments
              U.S. Treasury securities$9,440 $ $(88)$9,352 
              Certificates of deposit3,209   3,209 
              U.S. government funds83,421   83,421 
$96,070 $ $(88)$95,982 
 Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
As of December 31, 2021
Long-term investments:
Available-for-Sale Investments
Foreign deposits$6,050 $ $ $6,050 
Municipal bond1,000 11  1,011 
$7,050 $11 $ $7,061 
Short-term investments:
Held-to-Maturity Investments
U.S. Treasury securities$8,671 $ $(9)$8,662 
Certificates of deposit3,295   3,295 
U.S. government funds114,046   114,046 
$126,012 $ $(9)$126,003 


8



Maturities of debt securities classified as available-for-sale were as follows (in thousands):
 As of September 30, 2022
 Amortized
Cost
Fair
Value
Available-for-sale:
Due under one year$1,381 $1,368 
Due after one year through five years55,995 55,119 
$57,376 $56,487 
Held-to-maturity:
Due under one year$96,070 $95,982 
$96,070 $95,982 

The Company does not expect any credit losses from its held-to-maturity investments, considering the composition of the investment portfolio and the credit loss history of these investments. For available-for-sale debt securities, the Company determined that there were $0.9 million of unrealized losses and nil for the nine months ended September 30, 2022 and 2021, respectively. The Company does not expect any credit losses from its available-for-sale debt securities, considering the composition of the investment portfolio and the credit rating of these investments. For those securities, the Company determined it is not likely to, and did not intend to, sell prior to a potential recovery.
Proceeds from the sales of fixed maturities classified as available-for-sale were $5.9 million and nil during the nine months ended September 30, 2022 and 2021, respectively.

4. Other Investments
The Company has invested $7.0 million in preferred stock of a variable interest entity, Baystride, Inc., a U.S.-based privately held corporation operating in the pet food industry. The Company does not have power over the activities that most significantly impact the economic performance of the variable interest entity and is, therefore, not the primary beneficiary. The Company has the option to purchase all of the outstanding common shares issued by the variable interest entity in 2023 at an amount approximating its expected fair value. The preferred stock investment in the variable interest entity is accounted for as an available-for-sale debt security and measured at fair value at each balance sheet date.
Additionally, the Company has extended a $5.6 million revolving line of credit to the variable interest entity to fund its inventory purchases. The Company's investment and amounts loaned under the line of credit are recorded in other long-term assets on its consolidated balance sheet. The outstanding loan balance under the line of credit, including accrued interest, was $6.2 million and $4.5 million as of September 30, 2022 and December 31, 2021, respectively. The Company has also entered into a series of agreements to provide ancillary services to, and receive reimbursement from, the variable interest entity at cost. The Company provided $0.6 million of these services for the nine months ended September 30, 2022 and 2021.

9


5. Fair Value
Investments
The following tables summarize, by major security type, the Company's assets that are measured at fair value on a recurring basis, and placement within the fair value hierarchy (in thousands):
 As of September 30, 2022
 Fair ValueLevel 1Level 2Level 3
Assets
Money market funds$43,443 $43,443 $ $ 
Fixed maturities:
Mortgage-backed securities and collateralized mortgage obligations4,029  4,029  
Other asset-backed securities4,863  4,863  
Corporate bonds19,907  19,907  
Foreign deposits6,862 6,862   
Municipal bond995  995  
US Treasury securities19,831  19,831  
Preferred stock in variable interest entity8,442   8,442 
Total$108,372 $50,305 $49,625 $8,442 
 As of December 31, 2021
 Fair ValueLevel 1Level 2Level 3
Assets
Money market funds$32,255 $32,255 $ $ 
Fixed maturities:
Foreign deposits6,050 6,050   
Municipal bond1,011  1,011  
Preferred stock in variable interest entity8,442   8,442 
Total$47,758 $38,305 $1,011 $8,442 

The Company measures the fair value of money market funds and foreign deposits based on quoted prices in active markets for identical assets. Our fixed maturity investments classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including pricing vendors, dealers/market makers, and exchange-quoted prices. The fair value of the municipal bond is based on either recent trades in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. Held-to-maturity investments are carried at amortized cost, and the fair value and changes in unrealized gains (losses) are disclosed in Note 3, Investments. The fair value of these investments is determined in the same manner as available-for-sale securities and considered either a Level 1 or Level 2 measurement.
The Company's preferred stock investment in the variable interest entity (see Note 4) is accounted for as an available-for-sale debt security and measured at fair value at each balance sheet date. The estimated fair value of the preferred stock investment is a Level 3 measurement and is based on certain unobservable inputs such as the value of the underlying enterprise, volatility, time to liquidity, and market interest rates. An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement. Estimated fair value was $8.4 million as of September 30, 2022, unchanged from December 31, 2021, recorded in other long-term assets on the Company's consolidated balance sheet.
10


Fair Value Disclosures
The Company's other long-term assets balance included notes receivable of $9.2 million and $7.6 million as of September 30, 2022 and December 31, 2021, respectively, recorded at their estimated collectible amount. The Company estimates that the carrying value of the notes receivable approximates the fair value. The estimated fair value represents a Level 3 measurement within the fair value hierarchy and is based on market interest rates and the assessed creditworthiness of the third party. There was no significant activity in Level 3 of the hierarchy during the nine months ended September 30, 2022.
The Company estimates the fair value of long-term debt based upon rates currently available to the Company for debt with similar terms and remaining maturities. This is a Level 3 measurement. Based upon the terms of the debt, the carrying amount of long-term debt approximated fair value at September 30, 2022.
The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers between levels for the nine months ended September 30, 2022 and the year ended December 31, 2021.

6. Business Combinations
On August 31, 2022, the Company completed an acquisition of 100% of the equity of Smart Paws GmbH (Smart Paws), a pet insurance provider with operations in Germany and Switzerland, for approximately $2.8 million in net cash. The acquisition of Smart Paws provides the Company with a foothold in Europe, allowing for expansion within different countries within the region. The Company incurred $0.2 million of acquisition related costs that were included in general and administrative expenses during the three and nine months ended September 30, 2022.
The Company acquired a definite-lived intangible asset valued at $1.1 million with an estimated useful life of 5.0 years. Goodwill of $2.6 million was recognized as a result of the acquisition and attributable primarily to going concern value such as assembled workforce, future customers, and expected synergies from incorporating the operations into the Company’s portfolio. None of the goodwill associated with this acquisition is expected to be deductible for income tax purposes.
The results of Smart Paws operations have been included in the consolidated financial statements since the acquisition date, but were immaterial to the Company's consolidated financial statements.

7. Goodwill
The following is a summary of goodwill by reportable segment for the nine months ended September 30, 2022 (in thousands):
Subscription BusinessOther BusinessTotal
Balance as of December 31, 2021$32,709 $ $32,709 
Acquisitions2,618  2,618 
Effects of foreign currency(5,801) (5,801)
Balance as of September 30, 2022$29,526 $ $29,526 

8. Commitments and Contingencies
From time to time, the Company is or may become subject to various legal proceedings arising in the ordinary course of business, including proceedings against members, other entities or regulatory bodies. Estimated liabilities are recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. At this time, the Company does not believe any such matters to be material individually or in the aggregate. These views are subject to change following the outcome of future events or the results of future developments.

11


9. Reserve for Veterinary Invoices
The reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that are dated as of, or prior to, its balance sheet date. The reserve also includes the Company's estimate of related internal processing costs. The reserve estimate involves actuarial projections, and is based on management's assessment of facts and circumstances currently known, and assumptions about anticipated patterns. The Company uses generally accepted actuarial methodologies, such as paid loss development methods, in estimating the amount of the reserve for veterinary invoices. The reserve is made for each of the Company's segments, subscription and other business, and is continually refined as the Company receives and pays veterinary invoices. Changes in management's assumptions and estimates may have a relatively large impact to the reserve and associated expense.
Reserve for veterinary invoices
Summarized below are the changes in the total liability for the Company's subscription business segment (in thousands):
 Nine Months Ended September 30,
Subscription20222021
Reserve at beginning of year$22,407 $19,925 
Veterinary invoices during the period related to:
Current year323,724 262,721 
Prior years(2,981)(1,116)
Total veterinary invoice expense320,743 261,605 
Amounts paid during the period related to:
Current year301,730 240,488 
Prior years17,814 15,412 
Total paid319,544 255,900 
Non-cash expenses3,295 3,830 
Reserve at end of period$20,311 $21,800 

The Company's reserve for the subscription business segment decreased $2.1 million from $22.4 million at December 31, 2021 to $20.3 million at September 30, 2022. This change was primarily comprised of $320.7 million in expense recorded during the period less $319.5 million in payments of veterinary invoices. The $320.7 million in veterinary invoice expense incurred included a reduction of $3.0 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. For the nine months ended September 30, 2021, the Company's adjustment to prior year reserves was a reduction of $1.1 million as a result of analysis of payment trends.
Summarized below are the changes in total liability for the Company's other business segment (in thousands):
 Nine Months Ended September 30,
Other Business20222021
Reserve at beginning of year$17,264 $9,004 
Veterinary invoices during the period related to:
Current year152,358 91,912 
Prior years553 (307)
Total veterinary invoice expense152,911 91,605 
Amounts paid during the period related to:
Current year133,333 75,062 
Prior years17,611 8,597 
Total paid150,944 83,659 
Non-cash expenses  
Reserve at end of period$19,231 $16,950 

12


The Company’s reserve for the other business segment increased $2.0 million from $17.3 million at December 31, 2021 to $19.2 million at September 30, 2022. This change was comprised of $152.9 million in expense recorded during the period less $150.9 million in payments of veterinary invoices. The $152.9 million in veterinary invoice expense incurred included an increase of $0.6 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. For the nine months ended September 30, 2021, the Company's adjustment to decrease prior year reserves was $0.3 million as a result of analysis of payment trends.
Reserve for veterinary invoices, by year of occurrence
In the following tables, the reserve for veterinary invoices for each segment is presented as the amount (in thousands) by the year to which the veterinary invoice relates, referred to as the year of occurrence.
SubscriptionAs of September 30, 2022
Year of Occurrence
2020 and prior$35 
20211,577 
202218,699 
$20,311 

Other Business As of September 30, 2022
Year of Occurrence
2020 and prior$3 
2021203 
202219,025 
$19,231 

10. Debt
On March 25, 2022, the Company entered into a credit agreement that provides the Company with $150.0 million in credit (the Credit Facility) consisting of:
(a) an initial term loan in an aggregate principal amount of $60.0 million (Initial Term Loan), which was funded at closing;
(b) commitments for delayed draw term loans in an aggregate principal amount not in excess of $75.0 million (Delayed Draw Term Loans, and together with the Initial Term Loan, the Term Loans), which may be drawn from time to time until September 25, 2023; and
(c) commitments for revolving loans in an aggregate principal amount at any time outstanding not in excess of $15.0 million (Revolving Loans), which may be drawn at any time prior to March 25, 2027.
The Credit Facility bears interest at a floating base rate plus an applicable margin. The interest rate as of September 30, 2022 was approximately 7.20%. The Company incurred total debt issuance cost of approximately $5.8 million at closing, which is reported in the Consolidated Balance Sheet as a direct reduction from the carrying amount of the Credit Facility, and is amortized as interest expense over the term of five years.
The Credit Facility is secured by substantially all assets of the Company and its subsidiaries. Proceeds from the Credit Facility may be used for permitted acquisitions and investments, working capital and other general corporate purposes. The credit agreement contains financial and other covenants. As of September 30, 2022, the Company was in compliance with all financial and non-financial covenants.
13


To the extent not previously paid, the Initial Term Loan is due and payable on March 25, 2027, the Delayed Draw Term Loans are due and payable on the earlier of the five-year anniversary of their initial funding or March 25, 2028, and Revolving Loans are due and payable on March 25, 2027. The Company must repay 0.25% of any then-outstanding Term Loans, together with accrued and unpaid interest, on a quarterly basis. Future principal payments on outstanding borrowings as of September 30, 2022 are as follows (in thousands):

Year Ending December 31,September 30, 2022
2022$150 
2023600 
2024600 
2025600 
2026600 
Thereafter57,150 
Total$59,700 

11. Stock-Based Compensation
Stock-based compensation expense includes stock options and restricted stock units granted to employees and other service providers and has been reported in the Company’s consolidated statements of operations depending on the function performed by the employee or other service provider. Stock-based compensation expense recognized in each category of the consolidated statements of operations was as follows (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Veterinary invoice expense$998 $769 $3,232 $3,740 
Other cost of revenue474 542 1,906 2,029 
Technology and development1,184 749 3,193 2,213 
General and administrative3,792 2,271 9,281 6,412 
New pet acquisition expense2,195 2,112 7,214 7,024 
Total expensed stock-based compensation8,643 6,443 24,826 21,418 
Capitalized stock-based compensation542 170 1,144 463 
Total stock-based compensation$9,185 $6,613 $25,970 $21,881 

As of September 30, 2022, the Company had 1,167,569 unvested restricted stock units. Stock-based compensation expenses of $89.1 million related to unvested restricted stock units are expected to be recognized over a weighted average period of approximately 2.7 years.
Stock Options
A summary of the Company's stock option activity is as follows:
Number of OptionsWeighted Average Exercise Price per ShareAggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2021807,205 $13.39 $95,765 
Granted  — 
Exercised(124,752)12.73