TRUPANION INC., 10-K filed on 2/17/2016
Annual Report
Document and Entity Information Document (USD $)
12 Months Ended
Dec. 31, 2015
Feb. 10, 2016
Jun. 30, 2015
Entity [Abstract]
 
 
 
Entity Registrant Name
TRUPANION INC. 
 
 
Entity Central Index Key
0001371285 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2015 
 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
28,398,480 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 144,293,788 
Consolidated Statement of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Income Statement [Abstract]
 
 
 
Revenue
$ 146,963 
$ 115,910 
$ 83,829 
Claims expenses
103,324 
79,913 
56,637 
Other cost of revenue
18,410 
16,123 
11,548 
Gross profit
25,229 
19,874 
15,644 
Sales and marketing
15,231 
11,608 
9,091 
Technology Services Costs
11,215 
9,899 
4,888 
General and administrative
15,558 
14,312 
8,652 
Total operating expenses
42,004 
35,819 
22,631 
Operating loss
(16,775)
(15,945)
(6,987)
Interest expense
325 
6,726 
609 
Other (income) expense, net
(9)
(1,487)
671 
Loss before income taxes
(17,091)
(21,184)
(8,267)
Income tax expense (benefit)
114 
(7)
(92)
Net loss
$ (17,205)
$ (21,177)
$ (8,175)
Net loss per share: Basic and diluted (per share)
$ (0.62)
$ (1.64)
$ (6.23)
Weighted Average Number of Shares Outstanding, Basic and Diluted
27,638,443 
12,934,477 
1,312,019 
Consolidated Statement of Comprehensive Income Statement (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement of Comprehensive Income [Abstract]
 
 
 
Net loss
$ (17,205)
$ (21,177)
$ (8,175)
Foreign currency translation adjustments
(517)
65 
85 
Change in unrealized losses on available-for-sale securities
110 
(107)
Other comprehensive (loss) income, net of taxes
(513)
175 
(22)
Comprehensive loss
$ (17,718)
$ (21,002)
$ (8,197)
Consolidated Balance Sheet (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Assets [Abstract]
 
 
Cash and cash equivalents
$ 17,956 
$ 53,098 
Short-term Investments
25,288 
22,371 
Accounts and other receivables
8,196 
7,887 
Prepaid expenses and other assets
2,193 
1,299 
Total current assets
53,633 
84,655 
Investments in fixed maturities, at fair value
2,388 
942 
Equity Method Investments
300 
Property and equipment, net
9,719 
7,862 
Intangible assets, net
4,854 
4,847 
Other Assets, Noncurrent
23 
Total assets
70,917 
98,306 
Liabilities and Equity [Abstract]
 
 
Accounts payable
1,289 
1,962 
Accrued liabilities
4,189 
4,607 
Claims reserve
6,274 
5,107 
Deferred Revenue, Current
11,042 
9,345 
Warrant liabilities
 
Other payables
654 
1,399 
Deferred tax liabilities
169 
124 
Total current liabilities
23,617 
22,544 
Long-term debt
14,900 
Deferred tax liabilities
1,433 
1,495 
Other liabilities
511 
92 
Total liabilities
25,561 
39,031 
Common stock: $0.00001 par value per share
Preferred Stock, Value, Outstanding
Additional paid-in capital
122,844 
119,045 
Accumulated other comprehensive loss
(502)
11 
Accumulated deficit
(74,385)
(57,180)
Treasury stock, at cost
2,601 
2,601 
Total stockholders' deficit
45,356 
59,275 
Liabilities and Equity
$ 70,917 
$ 98,306 
Consolidated Balance Sheet Condensed Consolidated Balance Sheet Parentheticals (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Investment in fixed maturities, at amortized cost (fair value)
$ 25,288 
$ 22,371 
Investments in fixed maturities, at fair value (amortized cost)
$ 2,442 
$ 1,000 
Common Stock, Shares Authorized
200,000,000 
 
Common Stock, Shares, Outstanding
28,396,189 
 
Preferred Stock, Shares Authorized
10,000,000 
 
Common Stock
 
 
Common Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Issued
29,017,168 
28,451,920 
Common Stock, Shares, Outstanding
28,396,189 
27,830,941 
Convertible Preferred Stock [Member]
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Redeemable Convertible Preferred Stock
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
10,000,000 
10,000,000 
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Treasury Stock [Member]
 
 
Treasury Stock, Shares
620,979 
620,979 
Consolidated Statement of Stockholders' Equity Statement (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Redeemable Convertible Preferred Stock
Common Stock
Special Voting Shares
Additional Paid-in Capital
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss)
Treasury Stock [Member]
Beginning Balance at Dec. 31, 2012
$ (27,073)
$ 31,724 
$ 0 
$ 0 
$ 3,224 
$ (27,828)
$ (142)
$ (2,327)
Stock Issued During Period, Shares, Restricted Stock Award, Net of Forfeitures
 
 
732,708 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Issuance of stock, shares
 
 
5,846 
 
 
 
 
 
Treasury Stock, Shares, Acquired
 
 
(60,240)
 
 
 
 
 
Treasury Stock, Value, Acquired, Cost Method
(274)
 
 
 
 
 
 
(274)
Warrant reclassification from liability to equity
 
 
 
 
 
 
 
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures
 
 
547,981 
 
 
 
 
 
Stock Issued During Period, Value, Stock Options Exercised
607 
 
 
 
607 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
1,938 
 
 
 
1,938 
 
 
 
Common Stock, Shares, Outstanding
 
14,857,989 
2,236,641 
2,247,130 
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax
(22)
 
 
 
 
 
(22)
 
Net loss
(8,175)
 
 
 
 
(8,175)
 
 
Ending Balance at Dec. 31, 2013
(32,999)
31,724 
5,769 
(36,003)
(164)
(2,601)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Issuance of stock, shares
 
 
8,193,750 
 
 
 
 
 
Stock Issued During Period, Value, New Issues
72,722 
 
 
 
72,722 
 
 
 
Conversion of Stock, Special Voting Shares to Common Stock
 
 
2,247,130 
(2,247,130)
 
 
 
 
Conversion of Stock, Shares Converted
 
(14,944,945)
14,944,945 
 
 
 
 
 
Conversion of Stock, Amount Converted
32,724 
(32,724)
 
 
32,724 
 
 
 
Redemption of warrants
 
86,956 
25,170 
 
 
 
 
 
Settlement of warrant liabilities
270 
1,000 
 
 
270 
 
 
 
Warrant reclassification from liability to equity
3,180 
 
 
 
3,180 
 
 
 
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures
 
 
183,305 
 
 
 
 
 
Stock Issued During Period, Value, Stock Options Exercised
181 
 
 
 
181 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
4,199 
 
 
 
4,199 
 
 
 
Common Stock, Shares, Outstanding
 
27,830,941 
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax
175 
 
 
 
 
 
175 
 
Net loss
(21,177)
 
 
 
 
(21,177)
 
 
Ending Balance at Dec. 31, 2014
59,275 
119,045 
(57,180)
11 
(2,601)
Stock Issued During Period, Shares, Restricted Stock Award, Net of Forfeitures
 
 
4,616 
 
 
 
 
 
Shares Paid for Tax Withholding for Share Based Compensation
 
 
(72,197)
 
 
 
 
 
Adjustment to Additional Paid in Capital, Income Tax Effect from Share-based Compensation, Net
(643)
 
 
 
(643)
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Warrant reclassification from liability to equity
 
 
 
 
 
 
 
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures
 
 
632,829 
 
 
 
 
 
Stock Issued During Period, Value, Stock Options Exercised
1,335 
 
 
 
1,335 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
3,107 
 
 
 
3,107 
 
 
 
Common Stock, Shares, Outstanding
28,396,189 
28,396,189 
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax
(513)
 
 
 
 
 
(513)
 
Net loss
(17,205)
 
 
 
 
(17,205)
 
 
Ending Balance at Dec. 31, 2015
45,356 
122,844 
(74,385)
(502)
(2,601)
Beginning Balance at Sep. 30, 2015
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Common Stock, Shares, Outstanding
28,396,189 
 
 
 
 
 
Net loss
(3,001)
 
 
 
 
 
 
 
Ending Balance at Dec. 31, 2015
$ 45,356 
$ 0 
 
$ 0 
 
 
 
$ (2,601)
Consolidated Statement of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement of Cash Flows [Abstract]
 
 
 
Net loss
$ (17,205,000)
$ (21,177,000)
$ (8,175,000)
Depreciation and amortization
2,542,000 
1,674,000 
892,000 
Amortization of Financing Costs and Discounts
21,000 
5,033,000 
36,000 
Warrant (income) expense
(1,574,000)
543,000 
Stock-based compensation expense
3,002,000 
4,084,000 
1,938,000 
Increase (Decrease) in Other Operating Assets
(89,000)
57,000 
112,000 
Accounts receivable
(328,000)
(126,000)
(5,478,000)
Prepaid expenses and other current assets
(905,000)
(369,000)
(22,000)
Accounts payable
(347,000)
449,000 
242,000 
Accrued liabilities
51,000 
551,000 
1,258,000 
Claims reserve
1,241,000 
(505,000)
3,031,000 
Deferred revenue
1,779,000 
877,000 
4,529,000 
Other payables
(187,000)
225,000 
71,000 
Net cash used in operating activities
(10,425,000)
(10,801,000)
(1,023,000)
Purchases of investment securities
(24,800,000)
(34,894,000)
(26,064,000)
Maturities of investment securities
20,180,000 
28,601,000 
20,770,000 
Purchases of property and equipment
(4,894,000)
(5,633,000)
(1,473,000)
Payments to Acquire Equity Method Investments
(300,000)
Payments for (Proceeds from) Investments
(109,000)
770,000 
Net cash used in investing activities
(9,923,000)
(11,926,000)
(5,997,000)
Restricted cash
3,000,000 
(3,000,000)
Payments Related to Tax Withholding for Share-based Compensation
(643,000)
Proceeds from exercise of stock options
1,335,000 
211,000 
607,000 
Proceeds from line of credit and debt financing
17,000,000 
 
 
Repayment of debt financing
(14,900,000)
(15,000,000)
20,000,000 
Payments of Financing Costs
(103,000)
(56,000)
Net proceeds from IPO
72,755,000 
Net cash (used in) provided by financing activities
(14,208,000)
60,863,000 
17,551,000 
Effect of foreign exchange rates on cash, net
(586,000)
23,000 
174,000 
Net change in cash and cash equivalents
(35,142,000)
38,159,000 
10,705,000 
Cash and cash equivalents at beginning of period
53,098,000 
14,939,000 
4,234,000 
Cash and cash equivalents at end of period
17,956,000 
53,098,000 
14,939,000 
Income taxes paid
(139,000)
(9,000)
Interest paid
(155,000)
(1,494,000)
(642,000)
Warrants issued in conjunction with debt issuance
1,124,000 
3,806,000 
Exchange of stock for equity method investment
448,000 
Increase in payables for property and equipment
98,000 
911,000 
134,000 
Redemption of Warrants Non-Cash
1,270,000 
Warrant reclassification from liability to equity
3,180,000 
Parent Company [Member]
 
 
 
Statement of Cash Flows [Abstract]
 
 
 
Depreciation and amortization
126,000 
67,000 
37,000 
Amortization of Financing Costs and Discounts
21,000 
5,033,000 
36,000 
Warrant (income) expense
(1,574,000)
543,000 
Stock-based compensation expense
3,002,000 
4,084,000 
1,938,000 
Increase (Decrease) in Other Operating Assets
52,000 
Prepaid expenses and other current assets
14,000 
(339,000)
(64,000)
Accounts payable
(1,389,000)
889,000 
1,840,000 
Accrued liabilities
(8,000)
(84,000)
206,000 
Net cash used in operating activities
(3,928,000)
(2,583,000)
917,000 
Purchases of property and equipment
(149,000)
(243,000)
(65,000)
Payments to Acquire Equity Method Investments
(300,000)
Net cash used in investing activities
(20,349,000)
(22,452,000)
(9,520,000)
Restricted cash
3,000,000 
(3,000,000)
Payments Related to Tax Withholding for Share-based Compensation
(643,000)
Proceeds from exercise of stock options
1,335,000 
211,000 
607,000 
Repayment of debt financing
(14,900,000)
(15,000,000)
20,000,000 
Payments of Financing Costs
(103,000)
(56,000)
Net proceeds from IPO
72,755,000 
Net cash (used in) provided by financing activities
(14,208,000)
60,863,000 
17,551,000 
Effect of foreign exchange rates on cash, net
(517,000)
175,000 
(22,000)
Net change in cash and cash equivalents
(39,002,000)
36,003,000 
8,926,000 
Cash and cash equivalents at beginning of period
45,042,000 
9,039,000 
113,000 
Cash and cash equivalents at end of period
6,040,000 
45,042,000 
9,039,000 
Income taxes paid
Interest paid
(155,000)
(1,494,000)
(642,000)
Warrants issued in conjunction with debt issuance
1,124,000 
3,806,000 
Exchange of stock for equity method investment
448,000 
Redemption of Warrants Non-Cash
 
1,270,000 
Warrant reclassification from liability to equity
 
$ 3,180,000 
$ 0 
Condensed Consolidated Balance Sheet Parentheticals (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Investment in fixed maturities, at amortized cost (fair value)
$ 25,288 
$ 22,371 
Investments in fixed maturities, at fair value (amortized cost)
2,442 
1,000 
Common Stock, Shares Authorized
200,000,000 
 
Common Stock, Shares, Outstanding
28,396,189 
 
Preferred Stock, Shares Authorized
10,000,000 
 
Common Stock
 
 
Common Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Issued
29,017,168 
28,451,920 
Common Stock, Shares, Outstanding
28,396,189 
27,830,941 
Convertible Preferred Stock [Member]
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Redeemable Convertible Preferred Stock
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
10,000,000 
10,000,000 
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Treasury Stock [Member]
 
 
Treasury Stock, Shares
620,979 
620,979 
Special Voting Shares [Member]
 
 
Special Voting Shares, Par or Stated Value per Share
$ 0.00001 
$ 0.00001 
Special Voting Shares, Shares Authorized
Special Voting Shares, Shares Issued
Special Voting Shares, Shares Outstanding
Parent Company
 
 
Investment in fixed maturities, at amortized cost (fair value)
22,371 
16,088 
Investments in fixed maturities, at fair value (amortized cost)
$ 1,000 
$ 1,000 
Parent Company |
Common Stock
 
 
Common Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Issued
29,017,168 
28,451,920 
Common Stock, Shares, Outstanding
28,396,189 
27,830,941 
Parent Company |
Convertible Preferred Stock [Member]
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0 
$ 0 
Preferred Stock, Shares Authorized
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Parent Company |
Redeemable Convertible Preferred Stock
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
10,000,000 
10,000,000 
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Parent Company |
Treasury Stock [Member]
 
 
Treasury Stock, Shares
620,979 
620,979 
Parent Company |
Special Voting Shares [Member]
 
 
Special Voting Shares, Par or Stated Value per Share
$ 0 
$ 0 
Special Voting Shares, Shares Authorized
Special Voting Shares, Shares Issued
Special Voting Shares, Shares Outstanding
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Summary of Significant Accounting Policies
Description of Business
The Company provides medical insurance plans for cats and dogs throughout the United States, Canada and Puerto Rico. The Company’s data-driven, vertically-integrated approach enables us to provide pet owners with what we believe is the highest value medical plan for their pets, priced specifically for each pet’s unique characteristics. We strive to operate the business similar to other subscription-based businesses, with a focus on maximizing the lifetime value of each pet while sustaining a favorable ratio of lifetime value relative to acquisition cost.
Reclassifications
Certain prior year amounts have been reclassified within the Company’s consolidated financial statements from their original presentation to conform with the current period presentation. In addition, amounts in note 13 related to segments have been recast to reflect a change in the composition of Company’s segments as described in note 13.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies and the reported amounts of revenue and expenses. Significant items subject to such estimates and assumptions include the valuation of deferred tax assets, stock-based compensation, claims reserve, useful lives of software developed for internal use and income tax uncertainties. Actual results could differ from the estimates used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At times, cash on deposit may be in excess of the applicable federal deposit insurance corporation limits.
Accounts and Other Receivable
Receivables are comprised of trade receivables and other miscellaneous receivables. As of December 31, 2015 and 2014, receivables included $7.2 million and $6.8 million, respectively, for one-year policies written by an unaffiliated general agent.
No single customer made up more than 5% of accounts receivable as of December 31, 2015 or 2014.
Deferred Acquisition Costs
The Company incurs certain costs related to the successful acquisition of new and renewal customer contracts, which are capitalized. These costs include premium taxes, commissions, and referral fees that directly relate to the successful acquisition of new or renewal customer contracts. Deferred acquisition costs are included in prepaid expenses and other assets on the consolidated balance sheet and are amortized over the related policy term to the applicable financial statement line item, including sales and marketing expenses and other cost of revenue. Total deferred acquisition costs for the years ended December 31, 2015, 2014 and 2013 are summarized below (in thousands):
 
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Deferred acquisition costs capitalized
 
$
10,184

 
$
7,995

 
$
5,919

Deferred acquisition costs amortized:
 

 

 

Sales and marketing
 
1,490

 
858

 
663

Other cost of revenue
 
8,606

 
7,052

 
5,082

Total amortization
 
10,096

 
7,910

 
5,745

Balance at December 31,
 
$
557

 
$
469

 
$
384


Investments
The Company recognizes the following classifications of investments:
Short-term-investments—Investments with an initial maturity of less than one year are reported at amortized cost, which approximates fair value.
Available-for-Sale—Investments in fixed maturities not classified as short-term-investments are reported at fair value, and the temporary declines or increases from amortized cost are included as a component of other comprehensive income.
Available-for-sale securities are classified based upon the availability to be used in current operations.
Premiums and discounts on fixed maturity securities are amortized or accreted over the life of the security. Such amortization expense and accretion is included in interest income. Interest income is recognized in other (income) expense, net when earned.
A decline in the fair value of any available-for-sale security below amortized cost that is deemed to be other than temporary results in an impairment to reduce the amortized cost to fair value or recovery value. To determine whether an impairment is other than temporary, the Company considers its intent to sell the security, intent and ability to hold the security, as well as all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts, when developing estimates of cash flows expected to be collected. Realized capital gains and losses are determined on a specific identification basis and recorded as a part of other expense, net in the statement of operations.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from three to five years. Leasehold improvements are depreciated over the less of their expected useful life or the remaining term of the related lease.
Costs related to software developed for internal use are primarily related to the Company’s website, internal support systems, and proprietary billing and claims systems. Costs are capitalized during the application development stage of the project and amortized on a straight-line basis over the estimated useful lives of the related assets, estimated between three and five years, once the software is placed into service.
Intangible Assets
Indefinite-lived intangible assets, which are not amortized, are assessed for impairment at least annually and more frequently if circumstances indicate a possible impairment. The Company first performs a qualitative analysis to assess whether it is more likely than not the asset is impaired and, if necessary, a quantitative analysis is performed to measure impairment.
Assets with finite lives are amortized over their estimated remaining useful life.
Asset Impairment
Long-lived assets, such as property and equipment and definite lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
Claims Reserve
The claims reserve includes unpaid claims and claims adjustment expenses, which includes an estimate, based on past experience, for claims incurred but not reported. Such liabilities are necessarily based on assumptions and estimates, and while management believes the amount is adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in the period in which they become known.
Warrants
The Company issued warrants to purchase common or convertible preferred stock to third parties as a part of certain business and financing transactions. The Company values warrants using the Black-Scholes-Merton option-pricing model. Certain warrants were considered liability awards and were remeasured each reporting period until exercised, settled or reclassified to stockholders’ equity. See Note 12 for additional information.

Revenue Recognition
The Company generates revenue primarily from subscription fees for its medical insurance plan and other policies the Company writes, which is earned pro rata over the terms of the customer contracts.
No single customer accounted for more than 5% of the Company’s revenue in 2015, 2014 or 2013.
Claims Expense
Claims expenses include claims incurred, the cost of personnel administering the claims and providing customer service related to claims, and other operating expenses directly or indirectly related to claims administration.
Other Cost of Revenue
Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, renewal fees, credit card transaction fees and premium tax expenses. Other cost of revenue for the other business segment includes the commission the Company pays to the unaffiliated general agent and premium taxes on other policies in this segment.
Sales and Marketing
Sales and marketing expenses consist of costs to educate veterinarians and policy holders about the Company’s policy, converting leads to enrolled pets, print, online and promotional advertising costs and employee compensation and related costs.
Technology and Development
Technology and development expenses consist primarily of personnel costs and related expenses for the Company’s operations staff, which includes information technology development and infrastructure support, third-party services and depreciation of hardware and amortization of capitalized software and intangible assets.
General and Administrative
General and administrative expenses consist primarily of personnel costs and related expenses for the Company’s finance, actuarial, human resources, business development and general management functions, as well as facilities and professional services.

Other (Income) Expense, Net
Other (income) expense, net was comprised of the following (in thousands):
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Interest income
 
$
(75
)
 
$
(73
)
 
$
(86
)
Foreign exchange gain
 
36

 
41

 
76

Loss on disposal of fixed assets
 
20

 
111

 
44

Warrant remeasurement
 

 
(1,574
)
 
543

Other
 
10

 
8

 
94

Other (income) expense, net
 
$
(9
)
 
$
(1,487
)
 
$
671


Insurance Operations
Effective January 1, 2015, the Company formed a segregated account in Bermuda as part of Wyndham Insurance Company (SAC) Limited (WICL), and entered into a revised fronting and reinsurance arrangement with Omega General Insurance Company (Omega) to include its newly formed segregated account. The Company maintains all risk with the business written in Canada and consolidates the entity in its financial statements. Contractual requirements restrict dividends from this entity until after 2016, at which time dividends will be allowed subject to the Segregated Accounts Company Act of 2000, which allows for dividends only to the extent that the entity remains solvent and the value of its assets remain greater than the aggregate of its liabilities and its issued share capital and share premium accounts. WICL required the Company to invest initial capital of CAD $1.3 million.

For the Company’s Canadian business, all plans are written by Omega General Insurance Company (Omega) and the risk is assumed by the Company through a fronting and reinsurance agreement. Premiums are recognized and earned pro rata over the terms of the related customer contracts. Premiums recognized from the agreement in 2015, 2014 and 2013 were $30.9 million, $29.1 million and $24.7 million, respectively and deferred revenue relating to this arrangement at December 31, 2015 and 2014 was $0.9 million and $0.9 million, respectively. Reinsurance revenue was 21%, 25% and 29% of total revenue in 2015, 2014 and 2013, respectively. Cash designated for the purpose of paying claims related to this reinsurance agreement was $2.0 million and $1.7 million at December 31, 2015 and 2014, respectively. As required by the Office of the Superintendent of Financial institutions regulations related to the Company’s reinsurance agreement with Omega General Insurance Company, the Company is required to fund a Canadian Trust account with the greater of CAD $2.0 million or 115% of unearned Canadian premium plus 15% of outstanding Canadian claims, including all incurred by not reported claims.
The Company has not transferred any risk to third-party reinsurers.
In November 2012, the Company began writing one-year pet insurance policies for an unaffiliated general agent. Revenue during 2015, 2014 and 2013 totaled $9.9 million, $10.0 million and $7.0 million, respectively, and deferred revenue relating to this arrangement at December 31, 2015 and 2014 was $5.5 million and $5.1 million, respectively.
Advertising
Advertising costs are expensed as incurred, with the exception of television advertisements, which are expensed for the first time each advertisement is aired. Advertising costs amounted to $5.3 million, $3.2 million and $0.7 million, in 2015, 2014 and 2013, respectively.
Stock-Based Compensation
The Company measures compensation expense for stock-based transactions to employees at fair value on the date of grant and recognizes such cost, on a straight-line basis over the requisite service period (generally four years) net of estimated forfeitures, except for the restricted stock with a performance condition which is measured on graded and vesting schedule. Many factors are considered when estimating forfeitures, including types of awards, employee class and historical experience. Stock options are valued using the Black-Scholes-Merton option-pricing model. The fair value of restricted stock units (RSUs) and restricted stock awards is based on the fair value of the Company’s stock on the date of the grant.
The Company measures compensation cost for stock-based compensation to non-employees at fair value and remeasures the award each period until the award vests.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are provided for when it is considered more likely than not that deferred tax assets will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than a 50% likelihood of being realized. Penalties and interest are classified as a component of income taxes.
Foreign Currency
The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date. Revenue and expenses for each subsidiary are translated to U.S. dollars using a weighted-average rate for the relevant reporting period. Translation adjustments resulting from this process are included in accumulated other comprehensive loss, and totaled $0.4 million as of December 31, 2015. Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in an entity’s functional currency are included within other income.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. The Company manages its risk by investing cash equivalents and investment securities in money market instruments and securities of the U.S. government, U.S. government agencies and high-credit-quality issuers of debt securities.

Credit risk with respect to accounts receivable is dispersed due to the large number of customers. In addition, the Company’s credit risk is mitigated by the relatively short collection period.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Insurance contracts are excluded from the scope of this new guidance. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted, and must be applied retrospectively or modified retrospectively. The Company does not believe this ASU will have a material impact on its consolidated financial statements. 
In May 2015, the FASB issued an ASU amending short-term insurance contract disclosures and requiring more detailed disclosures to enable users of financial statements to understand information relating to liabilities for unpaid claims and claims adjustment expenses. Additionally, the amendments will also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate these liabilities. This guidance is effective for annual reporting periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. Early adoption of this guidance is permitted, and must be applied retrospectively by providing comparative disclosures for each period presented. The Company plans to adopt this guidance as of December 31, 2016.
In November 2015, the FASB issued an ASU amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. The Company plans to adopt this guidance as of December 31, 2016.
Net Loss per Share
Earnings Per Share [Text Block]
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Excluded from the weighted-average number of shares outstanding are shares that have been issued and are subject to future vesting and unvested restricted stock. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. Potentially dilutive common stock equivalents are comprised of convertible preferred stock and common stock, exchangeable shares, unvested restricted stock and stock options. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.
The following potential dilutive equity securities are not included in the diluted net loss per common share calculation because they would have had an antidilutive effect:
 
As of December 31,
 
2015
 
2014
 
2013
Stock options
4,871,949

 
5,112,556

 
4,663,445

Restricted stock awards and units
472,384

 
592,625

 
722,226

Warrants
869,999

 
869,999

 
884,111

Series A convertible preferred stock

 

 
7,466,283

Series B convertible preferred stock

 

 
3,546,384

Series C convertible preferred stock

 

 
3,845,322

Exchangeable shares

 

 
2,247,130



Convertible preferred stock is presented on an as converted basis to reflect the applicable conversion ratio at December 31, 2013.
Property Plant and Equipment (Notes)
Property and Equipment, Net
Property and Equipment, Net
Property and equipment, along with their useful lives, were as follows for the years ended December 31, 2015 and 2014 (in thousands):
 
Years Ended December 31,
 
2015
 
2014
Office and telephone equipment (5 years)
$
127

 
$
123

PC and networking hardware (3–4 years)
1,177

 
1,125

Software (3–5 years)
12,547

 
8,532

Furniture and fixtures (5 years)
711

 
711

Vehicles (5 years)
54

 
54

Leasehold improvement (over less of expected useful life of life of lease)
621

 
571

Property and equipment
15,237

 
11,116

Accumulated depreciation
(5,518
)
 
(3,254
)
Property and equipment, net
$
9,719

 
$
7,862


Depreciation and amortization expense for property and equipment was $2.5 million, $1.6 million and $0.9 million for 2015, 2014 and 2013, respectively.
The Company capitalized interest of $0.2 million and $0.1 million in 2014 and 2013, respectively, related to software developed for internal use.
Intangible Assets (Notes)
Intangible Assets Disclosure [Text Block]
Intangible Assets
The Company acquired an insurance company in 2007, which originally included licenses in 23 states. These licenses were valued at $4.8 million. The Company is currently licensed in all 50 states, the District of Columbia and Puerto Rico. Most licenses are renewed annually upon payment of various fees assessed by the issuing state. Renewal costs are expensed as incurred. This is considered an indefinite-lived intangible asset given the planned renewal of the certificates of authority and applicable licenses for the foreseeable future. No impairments have been recorded on this asset as of December 31, 2015.
Investment Securities (Notes)
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]
Investment Securities
The amortized cost, gross unrealized holding losses, and fair value of available-for-sale and short-term investments by major security type and class of security were as follows as of December 31, 2015 and 2014 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
As of December 31, 2015
 
 
 
 
 
       Available-for-sale:
 
 
 
 
 
Foreign deposits
$
1,442

 
$

 
$
1,442

Municipal bond
1,000

 
(54
)
 
$
946

 
$
2,442

 
$
(54
)
 
$
2,388

Short-term investments:
 
 
 
 
 
              U.S. Treasury securities
$
5,683

 
$

 
$
5,683

              Certificates of deposit
1,551

 

 
1,551

              U.S. government funds
18,054

 

 
18,054

 
$
25,288


$


$
25,288

 
 
 
 
 
 
 
Amortized
Cost
 
Gross
Unrealized Holding
Losses
 
Fair
Value
As of December 31, 2014
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
Municipal bond
$
1,000

 
$
(58
)
 
$
942

 
$
1,000


$
(58
)

$
942

Short-term investments:
 
 
 
 
 
U.S. Treasury securities
$
5,677

 
$

 
$
5,677

Certificates of deposit
800

 

 
$
800

U.S. government funds
15,894

 

 
$
15,894

 
$
22,371


$


$
22,371



Maturities of debt securities classified as available-for-sale were as follows (in thousands):
 
December 31, 2015
 
Amortized
Cost
 
Fair
Value
Available-for-sale:

 

Due under one year
$

 
$

Due after one year through five years
1,442

 
1,442

Due after five years through ten years
1,000

 
946

Due after ten years

 

 
$
2,442

 
$
2,388


The Company had one investment with an unrealized loss of $0.1 million and a fair value of $0.9 million at December 31, 2015 and 2014. This investment has been in an unrealized loss position for more than 12 months. The Company assessed the bond for credit impairment and determined that there is no intent to sell this bond and it is likely that it will hold the investment for a period of time sufficient to allow for recovery. Furthermore, future payments on this bond are insured by a financial guarantee insurer. Therefore, the Company believes that the unrealized loss on this bond constitutes a temporary impairment.
Fair Value
Fair Value Disclosures [Text Block]
Fair Value
The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.
When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 inputs: Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
As of December 31, 2015
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Foreign deposits
$
1,442

 
$
1,442

 
$

 
$

Municipal bond
946

 

 
946

 

Money market funds
7,545

 
7,545

 

 

Total
$
9,933

 
$
8,987

 
$
946

 
$

 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Municipal bond
$
942

 
$

 
$
942

 
$

Money market funds
44,575

 
44,575

 

 

Total
$
45,517

 
$
44,575

 
$
942

 
$



A rollforward of activity in liabilities valued using Level 3 inputs is as follows (in thousands):
 
Warrant Liabilities
 
2014
Balance at January 1,
$
4,900

Issued warrant liability awards
1,124

Settlement of warrant liability upon exercise
(1,270
)
Change in fair value upon remeasurement
(1,574
)
Reclassification to stockholders’ equity
(3,180
)
Balance at December 31,
$


 
Changes in fair value upon remeasurement are recorded in other (income) expense, net on the consolidated statement of operations.
The Company estimates fair value for its 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 December 31, 2014.
The Company’s accounting policy is to recognize 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 twelve months ended December 31, 2015 and 2014.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Investment securities: Long-term investments classified as available-for-sale are measured using quoted market prices when quoted market prices are available. If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs derived from observable market data obtained from third-party data providers. Short-term investments are carried at amortized cost and the fair value is disclosed in Note 3. Fair value is determined in the same manner as available-for-sale securities and is considered a Level 2 measurement.
Warrant liabilities: These liabilities are valued using the Black-Scholes-Merton option-pricing model using certain unobservable inputs that are estimated by the Company. These inputs include a measure of volatility using an average of peer companies’ publicly traded stock volatility, expected dividend payments based on management’s assertion that no dividends will be paid in the near term, the remaining contractual term and a discount rate using an average equivalent bond yield calculation. The range of inputs used is as follows:
 
Year Ended December 31,
 
2014
Expected volatility
34%-46%
Expected dividends
—%
Risk-free rate
0.03%-2.02%
Term
0.1-6.0 years


An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement, which may be significant. The liabilities were revalued each period-end until exercised, expired or modified to exclude recurring fair value measurement. Gains and losses on revaluation of the liabilities were recorded in other (income) expense, net in the Company’s consolidated financial statements.
Equity Method Investment (Notes)
Equity Method Investments and Joint Ventures Disclosure [Text Block]
Equity Method Investments
During 2015, the Company invested $0.3 million in DataPoint, LLC in exchange for 300,000 units of Series A preferred stock resulting in a 13% equity interest. Additionally, if certain revenue and EBIT (Earnings before interest and taxes) targets are not met as of April 1, 2017, the Company’s ownership interest will increase proportionally by the amount by which the targets were missed, up to a maximum of 28%. The Company’s equity interest in DataPoint, LLC is accounted for under the equity method as the Company has the ability to exert significant influence. The equity method investment balance is adjusted each period on a one quarter lag to recognize the proportionate share of net income or loss, including adjustments to recognize certain differences between the carrying value and the equity in net assets.
Commitment and Contingencies
Commitments and Contingencies Disclosure [Text Block]
Commitments and Contingencies
During the third quarter of 2015, the Company entered into a lease agreement for a building located in Seattle, Washington. The initial 10-year term of the lease is expected to commence in the second quarter of 2016. The Company is obligated to pay a total of $21.0 million over the 10-year term.
The Company has operating leases, related to equipment and office facilities, which expire over the next three years with various renewal options. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease. Rental expense for operating leases was $1.0 million, $0.8 million and $0.8 million during 2015, 2014 and 2013, respectively.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2015, are as follows (in thousands):
 
Year ending December 31:
 
2016
$
1,407

2017
1,502

2018
1,887

2019
2,047

2020
2,128

2021-2026
12,495

Total minimum lease payments
$
21,466


The Company has entered into agreements for strategic marketing initiatives, as well as with independent contractors to provide services for a period of time. Future commitments related to these contracts are as follows (in thousands):
 
Year ending December 31:
 
2016
$
2,075

2017
782

2018
326

2019
326

2020
141

2021
16

Total minimum commitment
$
3,666


During 2013, the Company determined that it owes goods and services tax (GST) and harmonized sales tax (HST) in Canada for certain intercompany fees charged to its Canadian entities from 2007 through 2013. The Company began a voluntary self-disclosure with the Canada Revenue Agency for these unpaid taxes in 2014 under the Canada Revenue Agency Voluntary Disclosures Program, which was accepted in 2014. During the second quarter of 2015, the Company received the final assessment of GST and HST owed and paid the full amount of $0.8 million to the Canada Revenue Agency.
The Company is involved from time to time in claims, regulatory examinations and litigation, including the following:
The Company received an inquiry from the Washington State Office of the Insurance Commissioner (OIC) in December 2012 concerning whether one of its subsidiaries was properly licensed, and whether certain of its employees were properly licensed, under Washington law. A regulatory examination took place during the third and fourth quarters of 2014. On September 22, 2015, the OIC issued a detailed report and the Company timely issued a response during the fourth quarter of 2015. As of December 31, 2015 and 2014, the Company had accrued liabilities of $0.4 million and $0.2 million, respectively, for this matter. Adverse outcomes beyond recorded amounts are reasonably possible. At this stage in the matter, however, the Company is unable to estimate a possible loss or range of possible loss beyond amounts accrued.
The outcomes of the Company’s legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to the Company’s operating results and cash flows for a particular period. The Company makes a provision for a liability relating to legal matters when it is both probable that a liability beyond previously accrued amounts has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.
Claims Reserve (Notes)
Claims Reserve
Activity in the claims reserve is summarized as follows (in thousands):
 
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Claims reserve at beginning of year
 
$
5,107

 
$
5,612

 
$
2,582

Claims incurred during the year related to:
 
 
 
 
 
 
Current year
 
103,373

 
80,438

 
56,702

Prior years
 
(49
)
 
(525
)
 
(65
)
Total claims incurred
 
103,324

 
79,913

 
56,637

Claims paid during year related to:
 
 
 
 
 
 
Current year
 
96,951

 
75,094

 
50,907

Prior years
 
4,987

 
5,088

 
2,516

Total claims paid
 
101,938

 
80,182

 
53,423

Non-cash claims expense
 
219

 
236

 
184

Claims reserve at end of year
 
$
6,274

 
$
5,107

 
$
5,612


The decrease in incurred claims for prior years in the year ended December 31, 2015, December 31, 2014 and December 31, 2013 is primarily due to less claims than expected relating to prior year claims.
Activity in the claims reserve is summarized as follows (in thousands):
 
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Claims reserve at beginning of year
 
$
5,107

 
$
5,612

 
$
2,582

Claims incurred during the year related to:
 
 
 
 
 
 
Current year
 
103,373

 
80,438

 
56,702

Prior years
 
(49
)
 
(525
)
 
(65
)
Total claims incurred
 
103,324

 
79,913

 
56,637

Claims paid during year related to:
 
 
 
 
 
 
Current year
 
96,951

 
75,094

 
50,907

Prior years
 
4,987

 
5,088

 
2,516

Total claims paid
 
101,938

 
80,182

 
53,423

Non-cash claims expense
 
219

 
236

 
184

Claims reserve at end of year
 
$
6,274

 
$
5,107

 
$
5,612

Debt
Debt Disclosure [Text Block]
. Debt

The Company has a revolving line of credit with a bank, which is secured by any and all interest the Company has in assets that are not otherwise restricted. The revolving line of credit bore a variable interest rate as of December 31, 2015 and 2014, equal to the greater of 5.0% or 1.5% plus the prime rate. Interest expense is due monthly on the outstanding principal amount with all amounts outstanding under the revolving line of credit due upon maturity in July 2017. The credit agreement requires the Company to comply with various financial and non-financial covenants. As of December 31, 2015 and December 31, 2014, the Company was in compliance with these covenants. This facility also had a compensating balance requirement of $0.5 million as of December 31, 2015 and 2014.

Borrowings on the revolving line of credit were limited to the lesser of $20.0 million in 2015 and 2014, and the total amount of cash and securities held by American Pet Insurance Company (APIC), less up to $3.0 million and $0.5 million, respectively, for obligations the Company may have outstanding for other ancillary services in the future. During 2015, the Company repaid its borrowings under this facility, and as of December 31, 2015, had no outstanding amounts under this facility. As of December 31, 2014, the Company’s outstanding borrowings under this facility were $14.9 million.

On December 23, 2013, the Company obtained a term loan in an aggregate principal amount of $12.0 million. This note was entered into at a discount of $3.8 million related to the issuance of warrants being deducted from the principal amount. On July 2, 2014, the Company entered into an amended and restated credit agreement in relation to this existing $12.0 million term loan for a secured subordinated term loan totaling $29.0 million, which reflected an increase of $17.0 million from the prior agreement. The amended principal amount was entered into at an additional discount of $1.1 million as a result of the issuance of warrants. The term loan bore a fixed interest rate of 11.0% per year and was due on the earlier of three years from the issue date or certain triggering events, including a qualifying IPO, which would result in a 1.5% prepayment premium on the $17.0 million increase related to the amendment. The $29.0 million term loan was repaid in full on July 23, 2014, including $0.9 million in accrued interest and a prepayment fee of $0.3 million. The unamortized discount on debt totaling $4.4 million was included in interest expense in the consolidated statement of operations.
The Company entered into a new lease agreement during the third quarter of 2015 which required the Company to issue a security deposit in the form of an irrevocable standby letter of credit totaling $1.1 million which expires in August 2016 and renews annually thereafter. This amount reduces the Company’s available revolving line of credit. As of December 31, 2015, the Company had $18.4 million available under its revolving line of credit.
Interest expense during 2015, 2014 and 2013 related to all loans was $0.3 million, $6.7 million and $0.6 million, respectively.
Stock-based Compensation
Stock-based Compensation
Stock-Based Compensation

In June 2014, the Company’s Board of Directors adopted the 2014 Equity Incentive Plan (2014 Plan), which succeeded the 2007 Equity Compensation Plan upon the Company’s IPO. The 2014 Plan authorizes the award of stock options or restricted stock to directors, officers, employees, and non-employees. All awards have 10-year contractual terms. At December 31, 2015, there were 3,068,551 additional shares available for the Company to grant under the 2014 Plan.
Stock Options
The grant date fair value of stock option awards are estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Valuation assumptions for the years ended December 31, 2015, 2014 and 2013 are presented in the following table:
 
 
 
Years Ended
December 31,
 
 
2015
 
2014
 
2013
Valuation assumptions:
 
 
 
 
 
 
Expected term (in years)
 
3.0-6.25
 
6.25
 
6.25
Expected volatility
 
37.2%-49.4%
 
54.3%–59.3%
 
54.9%–57.4%
Risk-free interest rate
 
1.1%-2.0%
 
1.8%–2.0%
 
1.0%–2.0%
Expected dividend yield
 
—%
 
—%
 
—%

Expected term: The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. As the Company does not have sufficient historical experience for determining the expected term of stock-based awards granted, the expected term for awards issued to employees is based on the simplified method, which represents the average period from vesting to the expiration of the stock option.
Expected volatility: As the Company does not have significant trading history for common stock, the expected stock price volatility for common stock is estimated by taking the average historical price volatility for identified peers based on daily price observations over a period equivalent to the expected term of the stock option grants. The Company does not rely on implied volatilities of traded options in identified peers’ common stock because the volume of activity is relatively low. The Company intends to continue to consistently apply this process using these or similar public companies until a sufficient amount of historical information regarding the volatility of the Company’s common stock price becomes available.
Risk-free interest rate: The risk-free interest rate for the expected term of the stock option is based on the U.S. Treasury yield curve at the date of grant.
Expected dividend yield: The Company does not expect to pay any dividends in the foreseeable future.
Stock option activity for the years ended December 31, 2015, 2014 and 2013 was as follows:
 
Number
of
Options
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
(in thousands)
December 31, 2012
4,226,883

 
1.32

 

Granted
1,294,150

 
4.40

 

Exercised
(547,981
)
 
1.11

 
2,285

Forfeited
(309,607
)
 
2.48

 

December 31, 2013
4,663,445

 
2.12

 
30,406

Granted
754,200

 
9.64

 

Exercised
(176,595
)
 
1.20

 
1,428

Forfeited
(128,494
)
 
5.40

 

December 31, 2014
5,112,556

 
3.19

 
21,116

Granted
698,764

 
7.84

 

Exercised
(632,829
)
 
2.12

 
3,703

Forfeited
(306,542
)
 
7.65

 

December 31, 2015
4,871,949

 
3.71

 
29,644

 
 
 
 
 
 
Vested and exercisable at December 31, 2015
3,575,646

 
$
2.35

 
$
26,590

As of December 31, 2015, stock options outstanding had a weighted average remaining contractual life of 6.1 years and vested and exercisable options had a weighted average remaining contractual life of 5.2 years.

The weighted-average grant date fair value of stock options granted and the fair value of options vested were as follows for the years ending December 31, 2015, 2014, and 2013:
 
 
Weighted- Average Grant Date Fair Value
 
Fair Value
of Options
Vested
 
 
(per share)
 
(in thousands)
Year:
 
 
 
 
2013
 
$
2.97

 
$
1,675

2014
 
$
5.33

 
$
2,203

2015
 
$
3.46

 
$
3,796



Restricted Stock Awards and Restricted Stock Units
The below table summarizes the Company’s restricted stock award activity for the years ending December 31, 2015, 2014 and 2013:
 
 
Number of 
Shares
 
Weighted- Average
Grant Date Fair Value Per
Restricted Stock
Nonvested stock award balance at December 31, 2012
 

 
$

Restricted stock awards granted
 
732,708

 
4.77

Awards upon which restrictions lapsed
 
(10,482
)
 
4.77

Restricted stock awards forfeited
 

 

Nonvested stock award balance at December 31, 2013
 
722,226

 
4.77

Restricted stock awards granted
 
6,126

 
5.79

Awards upon which restrictions lapsed
 
(143,967
)
 
4.81

Restricted stock awards forfeited
 

 

Nonvested stock award balance at December 31, 2014
 
584,385

 
4.77

Restricted stock awards granted
 
2,385

 
7.26

Awards upon which restrictions lapsed
 
(119,262
)
 
4.80

Restricted stock awards forfeited
 

 

Nonvested stock award balance at December 31, 2015
 
467,508

 
4.77


During the third quarters of 2015 and 2014, 116,877 shares of restricted stock, which were subject to a performance condition relating to the Company’s IPO, vested and resulted in $0.9 million and $1.6 million of expense, respectively, included in general and administrative expense in the consolidated statement of operations. The fair value of these vested shares was approximately $0.9 million and $1.2 million, respectively. The remaining 467,508 shares of unvested restricted stock related to this agreement are expected to vest over the remaining service term of approximately four years.
Stock-based compensation expense includes stock options, restricted stock units and restricted stock awards granted to employees and non-employees, and is reported in the Company’s consolidated statement of operations in claims expenses, other cost of revenue, sales and marketing, technology and development, and general and administrative expenses depending on the function performed by the employee or non-employee. Stock-based compensation expense recognized in each category of the consolidated statement of operations for the years ended December 31, 2015, 2014 and 2013 was as follows (in thousands):
 
Years Ended December 31,
 
2015
 
2014
 
2013
Claims expenses
$
219

 
$
236

 
$
184

Other cost of revenue
44

 
79

 
46

Sales and marketing
446

 
553

 
677

Technology and development
404

 
461

 
351

General and administrative
1,889

 
2,755

 
680

Total stock-based compensation
$
3,002

 
$
4,084

 
$
1,938


As of December 31, 2015, the Company had unrecognized stock-based compensation expense of $5.5 million, which is expected to vest over a weighted-average period of approximately 2.6 years. As of December 31, 2015, the Company had 1,257,414 unvested stock options and 472,384 restricted stock awards that are expected to vest. No net tax benefits related to the stock-based compensation costs have been recognized since the Company’s inception.
Stockholder's Equity (Notes)
Stockholders' Equity Note Disclosure [Text Block]
Stockholders Equity
On July 23, 2014 the Company completed an IPO pursuant to which 8,193,750 shares of common stock were sold to the public at a price of $10.00 per share. The Company received net proceeds of approximately $72.8 million from the IPO. Upon the closing of the IPO, all shares of outstanding convertible preferred stock and exchangeable shares automatically converted into 14,944,945 and 2,247,130 shares of common stock, respectively. If this transaction had taken place on January 1, 2014, the Company’s weighted-average shares outstanding for the twelve months ended December 31, 2014 would have been 27,067,167.
As of December 31, 2015, the Company had 200,000,000 shares of common stock authorized and 28,396,189 shares of common stock outstanding. Holders of common stock are entitled to one vote on each matter properly submitted to the stockholders of the Company except those related to matters concerning possible outstanding preferred stock. At December 31, 2015, the Company had 10,000,000 shares of undesignated shares of preferred stock authorized for future issuance and did not have any outstanding shares of preferred stock. The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of all classes of stock outstanding at the time. The Company is unable to pay dividends to stockholders as of December 31, 2015 due to restrictions in its credit agreements.
Warrants
At December 31, 2015 and 2014, the Company had warrants to purchase 869,999 shares of common stock at $10.00 per share, which begin to expire in 2018. At the end of each reporting period prior to the IPO, the Company adjusted the fair value of the warrants (see Note 6). Immediately following the IPO, these warrants were no longer subject to contractual modification provisions and were reclassified from a liability classification to an equity classification on the consolidated balance sheet.
Segments
Segment Reporting Disclosure [Text Block]
Segments
The Company has two segments: subscription business and other business. The subscription business segment includes monthly subscriptions related to the Company’s medical plan which are marketed directly to consumers, while the other business segment includes all other business that is not directly marketed to consumers. Prior to January 1, 2015, certain enrollments that were not marketed directly to consumers were included in the subscription business segment as they were not segregated in reporting used by the chief operating decision maker. As of January 1, 2015, the Company began reporting these pets in its other business segment due to the characteristics of this business being similar to other arrangements within the other business segment. In addition, the chief operating decision maker began using information related to the subscription business segment excluding these pets in order to evaluate the Company’s business and operations and make decisions. As such, these pets have been considered a part of the other business segment after January 1, 2015. Prior period segment information presented below has been recast to reflect this change.
The chief operating decision maker uses two measures to evaluate segment performance: revenue and gross profit. Additionally, other operating expenses, such as sales and marketing expenses, are allocated to each segment and evaluated when material. Interest and other expenses and income taxes are not allocated to the segments, nor included in the measure of segment profit or loss. The Company does not analyze discrete segment balance sheet information related to long-term assets.

Revenue and gross profit of the Company’s segments were as follows (in thousands):
 
Years Ended December 31,
 
2015
 
2014
 
2013
Revenue:
 
 
 
 
 
Subscription business
$
133,406

 
$
103,502

 
$
76,413

Other business
13,557

 
12,408

 
7,416

 
146,963

 
115,910

 
83,829

Claims expenses:
 
 
 
 
 
Subscription business
95,420

 
74,206

 
53,288

Other business
7,904

 
5,707

 
3,349

 
103,324

 
79,913

 
56,637

Other cost of revenue:
 
 
 
 
 
Subscription business
14,008

 
10,963

 
8,106

Other business
4,402

 
5,160

 
3,442

 
18,410

 
16,123

 
11,548

Gross profit:
 
 
 
 
 
Subscription business
23,978

 
18,333

 
15,019

Other business
1,251

 
1,541

 
625

 
25,229

 
19,874

 
15,644

Sales and marketing
15,231

 
11,608

 
9,091

Technology and development
11,215

 
9,899

 
4,888

General and administrative
15,558

 
14,312

 
8,652

Operating loss
$
(16,775
)
 
$
(15,945
)
 
$
(6,987
)


The following table presents the Company’s revenue by geographic region of the member (in thousands):
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
United States
$
116,585

 
$
86,494

 
$
58,847

Canada
30,378

 
29,416

 
24,982

Total revenue
$
146,963

 
$
115,910

 
$
83,829


Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2015 and 2014.
Dividend Restrictions Statutory Surplus (Notes)
Dividend Restrictions And Statutory Suprlus [Text Block]
Dividend Restrictions and Statutory Surplus
The Company’s business operations are conducted through subsidiaries, one of which is an insurance company domiciled in New York, and one which is a segregated cell business, Wyndham Segregated Account AX, located in Bermuda. In addition to general state law restrictions on payments of dividends and other distributions to stockholders applicable to all corporations, insurance companies are subject to further regulations that, among other things, may require such companies to maintain certain levels of equity and restrict the amount of dividends and other distributions that may be paid to their parent corporations.
Under regulatory requirements at December 31, 2015, the amount of dividends that may be paid by the Company’s insurance subsidiary in New York to the Company without prior approval by regulatory authorities was less than $0.1 million. The initial dividend payment to be paid from the segregated cell business to the Company, will not be calculated until 24 months from the effective date and annually thereafter. During 2015, 2014 and 2013, the Company’s insurance subsidiaries did not pay any dividends to the Company.    
The statutory net income for 2015, 2014 and 2013 and statutory capital and surplus at December 31, 2015, 2014 and 2013, for the Company’s insurance subsidiary was as follows (in thousands):
 
 
 
As of December 31,
 
 
2015
 
2014
 
2013
Statutory net income
 
$
1,386

 
$
990

 
$
1,126

Statutory capital and surplus
 
26,068

 
23,661

 
16,875


As of December 31, 2015, the Company’s insurance subsidiary maintained $26.1 million of statutory capital and surplus which was above the required amount of $24.5 million of statutory capital and surplus to avoid additional regulatory oversight. As of December 31, 2015 and 2014, the Company had $6.5 million on deposit with various states in which it writes policies.
Related Parties (Notes)
Related Party Transactions Disclosure [Text Block]
Related Parties
The Company is party to an arrangement with the father of the Company’s Chief Executive Officer, who serves as an independent contractor, to develop veterinary relationships and build referrals. The terms of the independent contractor agreement are consistent with the terms of other similar independent contractors that do business with the Company. Total amounts paid to the related party in 2015, 2014 and 2013 were $0.3 million.
Income Taxes (Notes)
Income Taxes
Income Taxes
Income (loss) before income taxes was as follows for the years ended December 31, 2015, 2014 and 2013 (in thousands):
 
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
United States
 
$
(17,222
)
 
$
(21,371
)
 
$
(8,256
)
Foreign
 
131

 
187

 
(11
)
 
 
$
(17,091
)
 
$
(21,184
)
 
$
(8,267
)

The components of income tax expense (benefit) were as follows (in thousands):
 
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Current:
 
 
 
 
 
 
U.S. federal & state
 
$
31

 
$
26

 
$
30

Foreign
 
84

 
(30
)
 
(122
)
 
 
115

 
(4
)
 
(92
)
Deferred:
 
 
 
 
 
 
U.S. federal & state
 

 

 

Foreign
 
(1
)
 
(3
)
 

 
 
(1
)
 
(3
)
 

Income tax expense (benefit)
 
$
114

 
$
(7
)
 
$
(92
)


A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements is presented below:
 
 
 
Years Ended December 31,    
 
 
2015
 
2014
 
2013
Federal income taxes at statutory rate
 
34.0
 %
 
34.0
 %
 
34.0
 %
Equity compensation
 
(1.2
)
 
(0.9
)
 
(8.6
)
Change in valuation allowance
 
(34.9
)
 
(32.5
)
 
(25.1
)
Other, net
 
1.4

 
(0.5
)
 
0.8

Effective income tax rate
 
(0.7
)%
 
0.1
 %
 
1.1
 %

The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
 
 
 
Years Ended December 31,         
 
 
2015
 
2014
Deferred tax assets:
 
 
 
 
Current:
 
 
 
 
Unearned premium reserves
 
$
745

 
$
863

Loss reserves
 
167

 
150

Other
 
690

 
801

Noncurrent:
 
 
 
 
Net operating loss carryforwards
 
20,514

 
14,346

Depreciation and amortization
 
451

 
356

Equity compensation
 
713

 
713

Other
 
96

 
228

Total deferred tax assets
 
23,376

 
17,457

Deferred tax liabilities:
 
 
 
 
Current:
 
 
 
 
Deferred costs
 
(189
)
 
(140
)
Noncurrent:
 
 
 
 
Intangible assets
 
(1,623
)
 
(1,623
)
Other
 
(72
)
 

Total deferred tax liabilities
 
(1,884
)
 
(1,763
)
Total deferred taxes
 
21,492

 
15,694

Less deferred tax asset valuation allowance
 
(23,110
)
 
(17,313
)
Net deferred taxes
 
$
(1,618
)
 
$
(1,619
)

At December 31, 2015, the Company had federal net operating loss carryforwards of $63.5 million. Use of the carryforwards is limited based on the future income of the Company. The federal net operating loss carryforwards will begin to expire in 2027. Approximately $3.1 million of the net operating loss (NOL) carryforwards relate to tax deductible stock-based compensation in excess of amounts recognized for financial statement purposes. To the extent that net operating loss carryforwards, if realized, relate to excess stock-based compensation, the resulting tax benefits will be recorded to stockholders’ equity, rather than to results of operations. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss carryforwards and credit carryforwards may be limited if the Company experiences an ownership change. The Company has not performed a significant analysis to determine whether the qualifying change in ownership that would limit the utilization of the NOLs has taken place.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its deferred tax assets at December 31, 2015 and 2014, because the Company’s management has determined that it is more likely than not that these assets will not be fully realized.
The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2012 through 2015. The Company is also open to examination for 2007 and forward with respect to net operating loss carryforwards generated and carried forward from those years in the United States. The Company is open to examination by the Canada Revenue Agency for the years ended December 31, 2011 through 2015 for all corporate tax matters, and open for the years ended December 31, 2008 through 2015 for transactions with non-arm’s length non-Canadian residents.
The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. If the tax position meets the more-likely-than-not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement with the relevant tax authority is recognized in the financial statements. Net unrecognized tax benefits, interest, and penalties not expected to be settled within one year are included in other long-term liabilities on the consolidated balance sheets. No significant changes in uncertain tax positions are expected in the next twelve months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
 
  
 
Years Ended
December 31,
 
 
2015
 
2014
 
2013
Balance, beginning of year
 
$
65

 
$
390

 
$
526

Decreases to tax positions related to prior periods
 

 
(346
)
 
(162
)
Increases to tax positions related to the current year
 
15

 
21

 
26

Balance, end of year
 
$
80

 
$
65

 
$
390

Retirement Plan (Notes)
Compensation and Employee Benefit Plans [Text Block]
The Company has a 401(k) plan for its U.S. employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows the Company to make a matching contribution, subject to certain limitations. To date, the Company has made no contributions to the 401(k) plan.
Quarterly Financial Information (Notes)
Quarterly Financial Information [Text Block]
Quarterly Financial Information (Unaudited)

The following table contains selected unaudited financial data for each quarter of 2015 and 2014. The unaudited information should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

 
Three Months Ended
 
Dec. 31, 2015
 
Sept. 30, 2015
 
Jun. 30, 2015
 
Mar. 31, 2015
 
Dec. 31, 2014
 
Sept. 30, 2014
 
Jun. 30, 2014
 
Mar. 31, 2014
 
(in thousands, except share amounts)
Total revenues
$
40,201

 
$
37,865

 
$
35,587