TRUPANION INC., 10-K filed on 2/24/2015
Annual Report
Document and Entity Information Document (USD $)
12 Months Ended
Dec. 31, 2014
Jul. 18, 2014
Entity [Abstract]
 
 
Entity Registrant Name
TRUPANION INC. 
 
Entity Central Index Key
0001371285 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Non-accelerated Filer 
 
Document Type
10-K 
 
Document Period End Date
Dec. 31, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
FY 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
27,830,941 
 
Entity Well-known Seasoned Issuer
No 
 
Entity Voluntary Filers
No 
 
Entity Current Reporting Status
Yes 
 
Entity Public Float
 
$ 56,969,288 
Consolidated Balance Sheet (USD $)
Dec. 31, 2014
Dec. 31, 2013
Assets [Abstract]
 
 
Cash and cash equivalents
$ 53,098,000 
$ 14,939,000 
Short-term Investments
22,371,000 
16,088,000 
Accounts and other receivables
7,887,000 
7,771,000 
Prepaid expenses and other assets
1,299,000 
935,000 
Total current assets
84,655,000 
39,733,000 
Restricted Cash and Cash Equivalents
3,000,000 
Investments in fixed maturities, at fair value
942,000 
832,000 
Property and equipment, net
7,862,000 
3,124,000 
Deferred offering costs
54,000 
Intangible assets, net
4,847,000 
4,910,000 
Total assets
98,306,000 
51,653,000 
Liabilities and Equity [Abstract]
 
 
Accounts payable
1,962,000 
1,263,000 
Accrued liabilities
4,607,000 
3,660,000 
Claims reserve
5,107,000 
5,612,000 
Deferred Revenue, Current
9,345,000 
8,468,000 
Short-term debt
900,000 
Warrant liabilities
4,900,000 
Other payables
1,399,000 
1,138,000 
Deferred tax liabilities
124,000 
82,000 
Total current liabilities
22,544,000 
26,023,000 
Long-term debt
14,900,000 
25,199,000 
Deferred tax liabilities
1,495,000 
1,540,000 
Other liabilities
92,000 
166,000 
Total liabilities
39,031,000 
52,928,000 
Redeemable convertible preferred stock: $0.00001 par value per share
31,724,000 
Common stock: $0.00001 par value per share
Preferred Stock, Value, Outstanding
Special voting shares: $0.00001 par value per share
Additional paid-in capital
119,045,000 
5,769,000 
Accumulated other comprehensive loss
11,000 
(164,000)
Accumulated deficit
(57,180,000)
(36,003,000)
Treasury stock, at cost
2,601,000 
2,601,000 
Total stockholders' deficit
59,275,000 
(32,999,000)
Total liabilities, redeemable convertible preferred stock, and stockholders' deficit
$ 98,306,000 
$ 51,653,000 
Consolidated Balance Sheet Condensed Consolidated Balance Sheet Parentheticals (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
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 
Common Stock, Shares Authorized
200,000,000 
 
Common Stock, Shares, Outstanding
27,830,941 
 
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 
26,000,000 
Common Stock, Shares, Issued
28,451,920 
2,857,620 
Common Stock, Shares, Outstanding
27,830,941 
2,236,641 
Convertible Preferred Stock [Member]
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
15,648,723 
Preferred Stock, Shares Issued
14,857,989 
Preferred Stock, Shares Outstanding
14,857,989 
Redeemable Convertible Preferred Stock
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
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
2,500,030 
Special Voting Shares, Shares Issued
2,247,130 
Special Voting Shares, Shares Outstanding
2,247,130 
Consolidated Statement of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
 
Revenue
$ 115,910 
$ 83,829 
$ 55,530 
Claims expenses
79,913 
56,637 
37,856 
Other cost of revenue
16,123 
11,548 
6,463 
Gross profit
19,874 
15,644 
11,211 
Sales and marketing
11,608 
9,091 
7,149 
Technology and development
9,899 
4,888 
3,406 
General and administrative
14,312 
8,652 
6,195 
Total operating expenses
35,819 
22,631 
16,750 
Operating loss
(15,945)
(6,987)
(5,539)
Interest expense
6,726 
609 
535 
Other (income) expense, net
(1,487)
671 
252 
Loss before income taxes
(21,184)
(8,267)
(6,326)
Income tax (benefit) expense
(7)
(92)
84 
Net Income (Loss) Attributable to Parent
(21,177)
(8,175)
(6,410)
Preferred Stock Redemption Premium
1,737 
Net loss
$ (21,177)
$ (8,175)
$ (8,147)
Net loss per share: Basic and diluted (per share)
$ (1.64)
$ (6.23)
$ (9.76)
Weighted Average Number of Shares Outstanding, Basic and Diluted
12,934,477 
1,312,019 
834,648 
Consolidated Statement of Comprehensive Income Statement (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
Net loss
$ (21,177,000)
$ (8,175,000)
$ (6,410,000)
Foreign currency translation adjustments
65,000 
85,000 
(8,000)
Change in unrealized losses on available-for-sale securities
110,000 
(107,000)
(61,000)
Other comprehensive income (loss), net of taxes
175,000 
(22,000)
(69,000)
Comprehensive loss
$ (21,002,000)
$ (8,197,000)
$ (6,479,000)
Consolidated Statement of Stockholders' Equity Statement (USD $)
Total
Redeemable Convertible Preferred Stock
Common Stock
Special Voting Shares
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Treasury Stock [Member]
Accumulated other comprehensive income (loss), beginning at Dec. 31, 2011
 
 
 
 
 
 
$ (73,000)
 
Accumulated deficit, beginning at Dec. 31, 2011
 
 
 
 
 
(21,418,000)
 
 
Additional paid-in capital, beginning at Dec. 31, 2011
 
 
 
 
2,819,000 
 
 
 
Common stock, value, outstanding beginning at Dec. 31, 2011
 
 
 
 
 
 
 
Total stockholders' deficit, beginning at Dec. 31, 2011
(18,672,000)
 
 
 
 
 
 
 
Preferred stock, value, outstanding beginning at Dec. 31, 2011
 
25,792,000 
 
 
 
 
 
 
Treasury stock, value, beginning at Dec. 31, 2011
 
 
 
 
 
 
 
Common stock, shares, outstanding beginning at Dec. 31, 2011
 
 
755,071 
 
 
 
 
 
Preferred stock, shares outstanding beginning at Dec. 31, 2011
 
13,731,559 
 
 
 
 
 
 
Exchangeable shares, value, beginning at Dec. 31, 2011
 
 
 
 
 
 
 
Exchangeable shares, beginning at Dec. 31, 2011
 
 
 
2,500,030 
 
 
 
 
Issuance of stock, shares
 
1,783,767 
60,240 
 
 
 
 
 
Issuance of stock, value
250,000 
6,922,000 
 
250,000 
 
 
 
Conversion of Stock, Shares Converted
 
 
252,900 
(252,900)
 
 
 
 
Conversion of Stock, Amount Converted
 
 
 
 
 
Stock Repurchased and Retired During Period, Shares
 
(657,337)
 
 
 
 
 
 
Stock Repurchased and Retired During Period, Value
(1,737,000)
(990,000)
 
 
(1,737,000)
 
 
 
Treasury Stock, Shares, Acquired
 
 
(560,739)
 
 
 
 
 
Treasury Stock, Value, Acquired, Cost Method
(2,327,000)
 
 
 
 
 
 
(2,327,000)
Proceeds from issuance initial public offering
 
 
 
 
 
 
 
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures
 
 
502,874 
 
 
 
 
 
Stock Issued During Period, Value, Stock Options Exercised
458,000 
 
 
458,000 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
1,434,000 
 
 
 
1,434,000 
 
 
 
Other Comprehensive Income (Loss), Net of Tax
(69,000)
 
 
 
 
 
(69,000)
 
Net loss
(6,410,000)
 
 
 
 
(6,410,000)
 
 
Accumulated other comprehensive income (loss), ending at Dec. 31, 2012
 
 
 
 
 
 
(142,000)
 
Accumulated deficit, ending at Dec. 31, 2012
 
 
 
 
 
(27,828,000)
 
 
Additional paid-in capital, ending at Dec. 31, 2012
 
 
 
 
3,224,000 
 
 
 
Common stock, value, outstanding ending at Dec. 31, 2012
 
 
 
 
 
 
 
Total stockholders' deficit, ending at Dec. 31, 2012
(27,073,000)
 
 
 
 
 
 
 
Preferred stock, value, outstanding ending at Dec. 31, 2012
 
31,724,000 
 
 
 
 
 
 
Treasury stock, value, ending at Dec. 31, 2012
 
 
 
 
 
 
 
(2,327,000)
Common stock, shares, outstanding ending at Dec. 31, 2012
 
 
1,010,346 
 
 
 
 
 
Preferred stock, shares outstanding ending at Dec. 31, 2012
 
14,857,989 
 
 
 
 
 
 
Exchangeable shares, value, ending at Dec. 31, 2012
 
 
 
 
 
 
 
Exchangeable shares, ending at Dec. 31, 2012
 
 
 
2,247,130 
 
 
 
 
Issuance of restricted stock, shares
 
 
732,708 
 
 
 
 
 
Issuance of restricted stock, value
 
 
 
 
 
 
 
Issuance of stock, shares
 
 
5,846 
 
 
 
 
 
Issuance of stock, value
 
 
 
 
 
 
 
Treasury Stock, Shares, Acquired
 
 
(60,240)
 
 
 
 
 
Treasury Stock, Value, Acquired, Cost Method
(274,000)
 
 
 
 
 
 
(274,000)
Proceeds from issuance initial public offering
 
 
 
 
 
 
 
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
607,000 
 
 
607,000 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
1,938,000 
 
 
 
1,938,000 
 
 
 
Other Comprehensive Income (Loss), Net of Tax
(22,000)
 
 
 
 
 
(22,000)
 
Net loss
(8,175,000)
 
 
 
 
(8,175,000)
 
 
Accumulated other comprehensive income (loss), ending at Dec. 31, 2013
 
 
 
 
 
 
(164,000)
 
Accumulated deficit, ending at Dec. 31, 2013
(36,003,000)
 
 
 
 
(36,003,000)
 
 
Total stockholders' deficit, ending at Dec. 31, 2013
(32,999,000)
 
 
 
 
 
 
 
Treasury stock, value, ending at Dec. 31, 2013
(2,601,000)
 
 
 
 
 
 
(2,601,000)
Preferred stock, value, outstanding ending at Dec. 31, 2013
31,724,000 
 
 
 
 
 
 
Common stock, value, outstanding ending at Dec. 31, 2013
 
 
 
 
 
 
Additional paid-in capital, ending at Dec. 31, 2013
5,769,000 
 
 
 
5,769,000 
 
 
 
Common stock, shares, outstanding ending at Dec. 31, 2013
 
 
2,236,641 
 
 
 
 
 
Preferred stock, shares outstanding beginning at Dec. 31, 2013
 
14,857,989 
 
 
 
 
 
 
Exchangeable shares, value, beginning at Dec. 31, 2013
 
 
 
 
 
 
 
Exchangeable shares, beginning at Dec. 31, 2013
 
 
 
2,247,130 
 
 
 
 
Issuance of stock, shares
 
 
8,193,750 
 
 
 
 
 
Issuance of stock, value
72,722,000 
 
 
 
72,722,000 
 
 
 
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
32,724,000 
(32,724,000)
 
32,724,000 
 
 
 
Redemption of warrants
 
86,956 
25,170 
 
 
 
 
 
Settlement of warrant liabilities
270,000 
1,000,000 
 
 
270,000 
 
 
 
Proceeds from issuance initial public offering
(72,755,000)
 
 
 
 
 
 
 
Warrant reclassification from liability to equity
3,180,000 
 
 
 
3,180,000 
 
 
 
Stock Issued During Period, Shares, Share-based Compensation, Net of Forfeitures
 
 
183,305 
 
 
 
 
 
Stock Issued During Period, Value, Stock Options Exercised
181,000 
 
 
181,000 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
4,199,000 
 
 
 
4,199,000 
 
 
 
Other Comprehensive Income (Loss), Net of Tax
175,000 
 
 
 
 
 
175,000 
 
Net loss
(21,177,000)
 
 
 
 
(21,177,000)
 
 
Accumulated other comprehensive income (loss), ending at Dec. 31, 2014
 
 
 
 
 
 
11,000 
 
Accumulated deficit, ending at Dec. 31, 2014
(57,180,000)
 
 
 
 
(57,180,000)
 
 
Additional paid-in capital, ending at Dec. 31, 2014
119,045,000 
 
 
 
119,045,000 
 
 
 
Common stock, value, outstanding ending at Dec. 31, 2014
 
 
 
 
 
 
Total stockholders' deficit, ending at Dec. 31, 2014
59,275,000 
 
 
 
 
 
 
 
Preferred stock, value, outstanding ending at Dec. 31, 2014
 
 
 
 
 
 
Treasury stock, value, ending at Dec. 31, 2014
(2,601,000)
 
 
 
 
 
 
(2,601,000)
Common stock, shares, outstanding ending at Dec. 31, 2014
27,830,941 
 
27,830,941 
 
 
 
 
 
Preferred stock, shares outstanding ending at Dec. 31, 2014
 
 
 
 
 
 
 
Exchangeable shares, value, ending at Dec. 31, 2014
 
 
 
$ 0 
 
 
 
 
Exchangeable shares, ending at Dec. 31, 2014
 
 
 
 
 
 
 
Consolidated Statement of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Cash Flows [Abstract]
 
 
 
Net loss
$ (21,177,000)
$ (8,175,000)
$ (6,410,000)
Depreciation and amortization
1,674,000 
892,000 
349,000 
Amortization of Financing Costs and Discounts
5,033,000 
36,000 
11,000 
Warrant (income) expense
(1,574,000)
543,000 
200,000 
Stock-based compensation expense
4,084,000 
1,938,000 
1,434,000 
Increase (Decrease) in Other Operating Assets
(57,000)
(112,000)
(58,000)
Accounts receivable
(126,000)
(5,478,000)
(1,889,000)
Prepaid expenses and other current assets
(369,000)
(22,000)
(432,000)
Accounts payable
449,000 
242,000 
291,000 
Accrued liabilities
551,000 
1,258,000 
853,000 
Claims reserve
(505,000)
3,031,000 
947,000 
Deferred revenue
877,000 
4,529,000 
2,574,000 
Other payables
225,000 
71,000 
471,000 
Net cash used in operating activities
(10,801,000)
(1,023,000)
(1,543,000)
Purchases of investment securities
(34,894,000)
(26,064,000)
(10,379,000)
Maturities of investment securities
28,601,000 
20,770,000 
8,909,000 
Purchases of property and equipment
(5,633,000)
(1,473,000)
(2,055,000)
Payments to Acquire Equity Method Investments
(249,000)
Other
770,000 
(770,000)
Net cash used in investing activities
(11,926,000)
(5,997,000)
(4,544,000)
Restricted cash
3,000,000 
(3,000,000)
Settlement of Forward Contract
(52,000)
Issuance of preferred stock
6,922,000 
Proceeds from (Repurchase of) Equity
(2,327,000)
Proceeds from exercise of stock options
211,000 
607,000 
458,000 
Redemption of preferred stock
(2,727,000)
Proceeds from line of credit and debt financing
17,000,000 
15,000,000 
Repayment of debt financing
(32,000,000)
5,000,000 
Payments of Financing Costs
(103,000)
(56,000)
Net proceeds from IPO
72,755,000 
Net cash provided by financing activities
60,863,000 
17,551,000 
2,274,000 
Effect of foreign exchange rates on cash, net
23,000 
174,000 
(40,000)
Net change in cash and cash equivalents
38,159,000 
10,705,000 
(3,853,000)
Cash and cash equivalents at beginning of period
14,939,000 
4,234,000 
8,087,000 
Cash and cash equivalents at end of period
53,098,000 
14,939,000 
4,234,000 
Income taxes paid
(9,000)
Interest paid
(1,494,000)
(642,000)
(570,000)
Warrants issued in conjunction with debt issuance
1,124,000 
3,806,000 
18,000 
Exchange of stock for equity method investment
448,000 
(250,000)
Increase in payables for property and equipment
911,000 
134,000 
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, 2014
Dec. 31, 2013
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 
Common Stock, Shares Authorized
200,000,000 
 
Common Stock, Shares, Outstanding
27,830,941 
 
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 
26,000,000 
Common Stock, Shares, Issued
28,451,920 
2,857,620 
Common Stock, Shares, Outstanding
27,830,941 
2,236,641 
Convertible Preferred Stock [Member]
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
15,648,723 
Preferred Stock, Shares Issued
14,857,989 
Preferred Stock, Shares Outstanding
14,857,989 
Redeemable Convertible Preferred Stock
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
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
2,500,030 
Special Voting Shares, Shares Issued
2,247,130 
Special Voting Shares, Shares Outstanding
2,247,130 
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 
26,000,000 
Common Stock, Shares, Issued
28,451,920 
2,857,620 
Common Stock, Shares, Outstanding
27,830,941 
2,236,641 
Parent Company |
Convertible Preferred Stock [Member]
 
 
Preferred Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Preferred Stock, Shares Authorized
15,648,723 
Preferred Stock, Shares Issued
14,857,989 
Preferred Stock, Shares Outstanding
14,857,989 
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 
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
$ 0.00001 
$ 0.00001 
Special Voting Shares, Shares Authorized
2,500,030 
Special Voting Shares, Shares Issued
2,247,130 
Special Voting Shares, Shares Outstanding
2,247,130 
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
Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the Company) is a direct-to-consumer monthly subscription service provider of a medical plan for cats and dogs throughout the United States, Canada and Puerto Rico.
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.

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, warrant liabilities, 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.

Restricted Cash
The Company considers any cash account that is restricted as to withdrawal or use under the terms of certain financing agreements as restricted cash. Cash will be considered restricted for so long as any obligations are outstanding. Restricted cash pledged as collateral for the term loan totaled $3.0 million as of December 31, 2013. During 2014, this outstanding term loan was repaid in full, which also resulted in a release of the Company’s restricted cash.
Accounts and Other Receivable
Receivables are comprised of trade receivables and other miscellaneous receivables. As of December 31, 2014 and 2013, receivables included $6.8 million and $7.4 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, 2014 or 2013.
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, 2014, 2013 and 2012 are summarized below (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Deferred acquisition costs capitalized
 
$
7,995

 
$
5,919

 
$
2,334

Deferred acquisition costs amortized:
 

 

 

Sales and marketing
 
858

 
663

 
755

Other cost of revenue
 
7,052

 
5,082

 
1,522

Total amortization
 
7,910

 
5,745

 
2,277

Balance at December 31,
 
$
469

 
$
384

 
$
210


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 when earned.
A decline in the fair value of any available-for-sale or held-to-maturity 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 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
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 2014, 2013 or 2012.
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 includes direct and indirect customer service expenses, credit card transaction fees, premium tax expenses and expenses related to an unaffiliated general agent.
Sales and Marketing
Sales and marketing expenses consist of referral fees paid with respect to newly enrolled pets, print, online and promotional advertising costs and employee compensation and related costs.
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.
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.
Other (Income) Expense, Net
Other (income) expense, net was comprised of the following (in thousands):
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Interest income
 
$
(73
)
 
$
(86
)
 
$
(75
)
Foreign exchange gain
 
41

 
76

 
3

Loss on disposal of fixed assets
 
111

 
44

 
26

Warrant remeasurement
 
(1,574
)
 
543

 
200

Other
 
8

 
94

 
98

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

 
$
252


Fronting Agreement
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. Omega retains an annual fee for fronting the Company’s insurance business in Canada, and all risks are retained within the Company. Premiums are recognized and earned pro rata over the terms of the related customer contracts. Premiums recognized from the agreement in 2014, 2013 and 2012 were $29.1 million, $24.7 million and $20.7 million, respectively and deferred revenue relating to this arrangement at December 31, 2014 and 2013 was $0.9 million and $0.7 million, respectively. Reinsurance revenue was 25%, 29% and 37% of total revenue in 2014, 2013 and 2012, respectively. Cash designated for the purpose of paying claims related to this reinsurance agreement was $1.7 million and $1.6 million at December 31, 2014 and 2013, respectively.
The Company has not transferred any risk to third-party reinsurers.
Other Policies
In November 2012, the Company began writing one-year pet insurance policies for an unaffiliated general agent. Revenue during 2014, 2013 and 2012 totaled $10.0 million, $7.0 million and $0.2 million, respectively, and deferred revenue relating to this arrangement at December 31, 2014 and 2013 was $5.1 million and $5.2 million, respectively.
Advertising
Advertising costs are expensed as incurred. Advertising costs amounted to $3.2 million, $0.7 million and $0.3 million, in 2014, 2013 and 2012, 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). 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. 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, 2016, with early adoption prohibited, and must be applied retrospectively or modified retrospectively. We are currently evaluating the impact this ASU will have on our consolidated financial statements.
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, warrants for the purchase 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,
 
2014
 
2013
 
2012
Stock options
5,112,556

 
4,663,445

 
4,226,883

Restricted stock awards and units
592,625

 
722,226

 

Warrants
869,999

 
884,111

 
124,857

Series A convertible preferred stock

 
7,466,283

 
7,466,283

Series B convertible preferred stock

 
3,546,384

 
3,546,384

Series C convertible preferred stock

 
3,845,322

 
3,845,322

Exchangeable shares

 
2,247,130

 
2,247,130



Convertible preferred stock is presented on an as converted basis to reflect the applicable conversion ratio at December 31, 2013 and 2012.
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, 2014 and 2013 (in thousands):
 
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
Office and telephone equipment (5 years)
$
123

 
$
128

PC and networking hardware (4 years)
1,125

 
827

Software (3–5 years)
8,532

 
3,222

Furniture and fixtures (5 years)
711

 
497

Vehicles (5 years)
54

 

Leasehold improvement (over life of lease)
571

 
212

Property and equipment
11,116

 
4,886

Accumulated depreciation
(3,254
)
 
(1,762
)
Property and equipment, net
$
7,862

 
$
3,124


Depreciation and amortization expense for property and equipment was $1.6 million, $0.9 million and $0.3 million for 2014, 2013 and 2012, respectively.
The Company capitalized interest of $0.2 million, $0.1 million and $0.03 million in 2014, 2013 and 2012, 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, 2014.
The Company has another intangible asset, which is being amortized over the expected useful life of the asset. The amortization expense for 2014, 2013 and 2012 was $0.1 million, $0.04 million and $0, respectively, and the value of the intangible asset at December 31, 2014 and 2013 was $0.1 million and $0.1 million, respectively. Future amortization expense for this asset is expected to be as follows (in thousands):
 
 
 
Year ending December 31:
 
2015
$
63

2016
11

Total future amortization:
$
74

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, 2014 and 2013 (in thousands):

 
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

 
 
 
 
 
 
 
AMORTIZED
COST
 
GROSS
UNREALIZED
HOLDING
LOSSES
 
FAIR
VALUE
As of December 31, 2013
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
Municipal bond
$
1,000

 
$
(168
)
 
$
832

 
$
1,000


$
(168
)

$
832

Short-term investments:
 
 
 
 
 
U.S. Treasury securities
$
5,778

 
$

 
$
5,778

Certificates of deposit
2,700

 

 
$
2,700

U.S. government funds
7,610

 

 
$
7,610

 
$
16,088


$


$
16,088




Maturities of securities classified as available-for-sale were as follows (in thousands):
 
DECEMBER 31, 2014
 
AMORTIZED
COST
 
FAIR
VALUE
Available-for-sale:

 

Due under one year
$

 
$

Due after one year through five years

 

Due after five years through ten years
1,000

 
942

Due after ten years

 

 
$
1,000

 
$
942


The Company had one investment with an unrealized loss of $0.1 million and a fair value of $0.9 million at December 31, 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. Further, 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, 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

 
$

 
 
 
 
 
 
 
 
 
AS OF DECEMBER 31, 2013
 
FAIR VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Assets
 
 
 
 
 
 
 
Restricted cash
$
3,000

 
$
3,000

 
$

 
$

Municipal bond
832

 

 
832

 

Total
$
3,832

 
$
3,000

 
$
832

 
$

Liabilities

 
 
 
 
 
 
Warrant liabilities
$
4,900

 
$

 
$

 
$
4,900

Total
$
4,900

 
$

 
$

 
$
4,900



A rollforward of activity in liabilities valued using Level 3 inputs is as follows (in thousands):
 
WARRANT LIABILITIES
 
2014
 
2013
Balance at January 1,
$
4,900

 
$
551

Issued warrant liability awards
1,124

 
3,806

Settlement of warrant liability upon exercise
(1,270
)
 

Change in fair value upon remeasurement
(1,574
)
 
543

Reclassification to stockholders’ equity
(3,180
)
 

Balance at December 31,
$

 
$
4,900


 
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 and 2013.
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, 2014.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Investment securities: Debt securities 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:
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
Expected volatility
34%-46%
 
35%–43%
Expected dividends
—%
 
—%
Risk-free rate
0.03%-2.02%
 
0.1%–2.10%
Term
0.1-6.0 years
 
0.3–6.3 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
In May 2013, the Company and an equity method investee came to an agreement to exchange the Company’s investment for shares of the Company’s common stock held by the investee. In addition, the Company obtained an exclusivity agreement which was recorded as an intangible asset. Per the terms of the contract, any intellectual property developed as a part of this relationship is the property of the Company. A loss of $0.1 million was recognized on this transaction in 2013.
Commitment and Contingencies
Commitments and Contingencies Disclosure [Text Block]
Commitments and Contingencies
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 $0.8 million, $0.8 million and $0.6 million during 2014, 2013 and 2012, respectively.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2014, are as follows (in thousands):
 
Year ending December 31:
 
2015
$
766

2016
447

2017
6

Total minimum lease payments
$
1,219

 
 

The Company has entered into agreements 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:
 
2015
$
101

2016
151

2017
101

2018
51

2019
51

2020-2021
66

Total minimum commitment
$
521

 
 

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. The Company has accrued $0.9 million of GST/HST tax for the 2007 through 2013 tax years, including interest, related to prior period GST/HST unpaid taxes.
The Company is involved from time to time in claims, regulatory examinations and litigation, including the following:
The Company’s subsidiary, APIC, a New York corporation, received an inquiry from the California Department of Insurance (CDOI) in 2011 alleging APIC’s trial insurance policies issued in California are in violation of California law. The Company has disputed this assertion. In July 2014, the CDOI filed a notice of non-compliance regarding this issue. As of December 31, 2014, the Company had accrued liabilities of $0.4 million for this matter. On February 12, 2015, APIC and CDOI entered into a Stipulation and Waiver whereby APIC voluntarily agreed to remove its trial certificate program in favor of a new program that has been pre-approved by the CDOI. APIC also agreed to pay a fine and reimburse CDOI expenses in an aggregate amount of $0.4 million. Pursuant to the stipulation, APIC did not admit any wrongdoing and continues to believe that its program was permissible under California law; however, the Company determined that it was in its best interest to resolve the dispute amicably.
The Company received an inquiry from the Washington State Office of the Insurance Commissioner (OIC) in December 2012 concerning whether a subsidiary of the Company was properly licensed, and whether certain of its employees were properly licensed, under Washington law. The Company responded to this letter in January of 2013 confirming that our subsidiaries are licensed and that our employees are not required to be licensed under Washington law. In October 2013, OIC sent further correspondence informing APIC that the results of a market conduct examination regarding its use of unlicensed non-appointed producers were being referred to OIC’s enforcement committee and that such committee would notify APIC in the event action is taken in regard to possible violations. The Company received additional correspondence from the OIC in July 2014 informing it that the OIC is scheduling a regulatory examination to further assess the Company’s compliance. A regulatory examination took place during the third and fourth quarters of 2014. As of December 31, 2014, the Company had accrued liabilities of $0.2 million 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 our 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,
 
 
2014
 
2013
 
2012
Claims reserve at beginning of year
 
$
5,612

 
$
2,582

 
$
1,637

Claims incurred during the year related to:
 
 
 
 
 
 
Current year
 
80,438

 
56,702

 
37,779

Prior years
 
(525
)
 
(65
)
 
77

Total claims incurred
 
79,913

 
56,637

 
37,856

Claims paid during year related to:
 
 
 
 
 
 
Current year
 
75,094

 
50,907

 
35,250

Prior years
 
5,088

 
2,516

 
1,584

Total claims paid
 
80,182

 
53,423

 
36,834

Non-cash claims expense
 
236

 
184

 
77

Claims reserve at end of year
 
$
5,107

 
$
5,612

 
$
2,582


The decrease in incurred claims for prior years in the year ended December 31, 2014 and December 31, 2013 is primarily due to less claims than expected for 2013 and 2012 claims, respectively. For the year ended December 31, 2012, the increase in incurred claims for prior years is primarily due to unanticipated claims development in those years from prior year claims and the corresponding change in the estimates of ultimate liabilities for incurred claims.
Activity in the claims reserve is summarized as follows (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Claims reserve at beginning of year
 
$
5,612

 
$
2,582

 
$
1,637

Claims incurred during the year related to:
 
 
 
 
 
 
Current year
 
80,438

 
56,702

 
37,779

Prior years
 
(525
)
 
(65
)
 
77

Total claims incurred
 
79,913

 
56,637

 
37,856

Claims paid during year related to:
 
 
 
 
 
 
Current year
 
75,094

 
50,907

 
35,250

Prior years
 
5,088

 
2,516

 
1,584

Total claims paid
 
80,182

 
53,423

 
36,834

Non-cash claims expense
 
236

 
184

 
77

Claims reserve at end of year
 
$
5,107

 
$
5,612

 
$
2,582

Debt
Debt Disclosure [Text Block]
. Debt

The Company’s outstanding debt at December 31, 2014 was as follows:

BALANCE
 
INTEREST RATE
 
MATURITY
 
(in thousands)
 
 
Line of credit
$14,900
 
5%
 
July 23, 2016


The Company has a revolving line of credit with Square 1 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, 2014 and 2013, 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 2016. The credit agreement requires the Company to comply with various financial and non-financial covenants. As of December 31, 2014, the Company was in compliance with these covenants. This facility also has a compensating balance requirement of $0.5 million.

Borrowings on the revolving line of credit were limited to the lesser of $20.0 million and $15.0 million in 2014 and 2013, respectively, and the total amount of cash and securities held by American Pet Insurance Company (APIC), less up to $0.5 million for obligations the Company may have outstanding for other ancillary services.

On March 28, 2013, the Company obtained a term loan from the same bank of $3.0 million in aggregate principal. The interest rate on the term loan was the greater of 5.5% or 2.0% plus the prime rate. All amounts outstanding under the term loan, including principal and accrued interest, were payable in 30 equal monthly installments beginning on April 28, 2014. During July 2014, this outstanding term loan was repaid in full, which also resulted in a release of the Company’s restricted cash.

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.
Interest expense during 2014, 2013 and 2012 related to all loans was $6.7 million, $0.6 million and $0.5 million, respectively. Total maturities of debt in 2015 and 2016 are $0 and $14.9 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, 2014, there were 2,252,752 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, 2014, 2013 and 2012 are presented in the following table:
 
 
 
YEARS ENDED
DECEMBER 31,
 
 
2014
 
2013
 
2012
Valuation assumptions:
 
 
 
 
 
 
Expected term (in years)
 
6.25
 
6.25
 
6.25
Expected volatility
 
54.3%–59.3%
 
54.9%–57.4%
 
60%
Risk-free interest rate
 
1.8%–2.0%
 
1.0%–2.0%
 
0.9%-1.3%
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, 2014, 2013 and 2012 was as follows:
 
NUMBER
OF
OPTIONS
 
WEIGHTED-
AVERAGE
EXERCISE
PRICE
 
AGGREGATE
INTRINSIC
VALUE
(in thousands)
December 31, 2011
4,506,708

 
$
1.06

 
$

Granted
352,146

 
4.05

 

Exercised
(502,874
)
 
0.91

 
1,579

Forfeited
(129,097
)
 
1.28

 

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

 
 
 
 
 
 
Vested and exercisable at December 31, 2014
3,578,138

 
$
1.77

 
$
18,541

As of December 31, 2014, stock options outstanding had a weighted average remaining contractual life of 6.8 years and vested and exercisable options had a weighted average remaining contractual life of 5.5 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, 2014, 2013, and 2012:
 
 
WEIGHTED-AVERAGE GRANT DATE FAIR VALUE
 
FAIR VALUE
OF OPTIONS
VESTED
 
 
(per share)
 
(in thousands)
Year:
 
 
 
 
2012
 
$
2.26

 
$
1,296

2013
 
$
2.97

 
$
1,675

2014
 
$
5.33

 
$
2,203



Restricted Stock Awards
The below table summarizes the Company’s restricted stock award activity for the years ending December 31, 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


During the third quarter of 2014, 116,877 shares of restricted stock, which were subject to a performance condition relating to the Company’s IPO, vested and resulted in $1.6 million of expense included in general and administrative expense in the consolidated statement of operations. The fair value of these vested shares was approximately $1.2 million. The remaining 584,385 shares of unvested restricted stock related to this agreement are expected to vest over the remaining service term of approximately five 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. The Company measures stock-based compensation expense on a straight-line basis, except for the restricted stock with a performance condition which is measured on a graded vesting schedule. Stock-based compensation expense recognized in each category of the consolidated statement of operations for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands):
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
 
2012
Claims expenses
$
236

 
$
184

 
$
77

Other cost of revenue
79

 
46

 
32

Sales and marketing
553

 
677

 
428

Technology and development
461

 
351

 
268

General and administrative
2,755

 
680

 
629

Total stock-based compensation
$
4,084

 
$
1,938

 
$
1,434


As of December 31, 2014, the Company had unrecognized stock-based compensation expense of $7.2 million, which is expected to vest over a weighted-average period of approximately 1.94 years. As of December 31, 2014, the Company had 1,534,418 unvested stock options and 592,625 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, 2014, the Company had 200,000,000 shares of common stock authorized and 27,830,941 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, 2014, 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, 2014 due to restrictions in its credit agreements.
Warrants
Immediately prior to the Company’s IPO, there were warrants to purchase 1,164,085 shares of common stock outstanding, of which warrants to purchase 415,646 of shares of common stock were issued on July 2, 2014 in connection with an amended and restated credit agreement that contained terms modifying the exercise price and number of underlying shares upon completion of an IPO, resulting in historical liability classification in the consolidated balance sheet. Upon the closing of the IPO, the number of shares underlying these warrants was adjusted to 869,999 shares, and the exercise price of each warrant was adjusted to $10.00 per share. These warrants were also revalued resulting in a gain of $2.0 million, which was recorded in other (income) expense, net in the statement of operations. 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.

Upon issuance of each warrant, the fair value of the warrant was determined using the Black-Scholes-Merton option-pricing model and recorded as a deferred financing cost and amortized over the term of the related financing agreement. Common stock warrants had provisions modifying both the strike price and the number of shares issuable upon exercise of the warrants upon certain events, which resulted in liability classification in the consolidated balance sheet. At the end of each reporting period prior to the IPO, the Company adjusted the fair value of the warrants (see Note 6). There was significant judgment used in determining the unobservable inputs used in valuing these instruments. A change in the inputs used, particularly related to the fair value of the underlying shares, could have resulted in a significantly higher or lower fair value estimate.
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, while the other business segment includes all other business, including policies written for third parties and policies written under a federal government program. The chief operating decision maker uses two measures to evaluate segment performance: revenue and gross profit. Corporate operating expenses, 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 assets. In the first quarter of 2015, employer paid contracts will be included in the other business segment based upon changes to management financial reporting as of January 1, 2015.

Revenue and gross profit of the Company’s segments were as follows (in thousands):
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Subscription business
$
105,052

 
$
76,818

 
$
55,352

Other business
10,858

 
7,011

 
178

 
115,910

 
83,829

 
55,530

Claims expenses:
 
 
 
 
 
Subscription business
75,397

 
53,787

 
37,773

Other business
4,516

 
2,850

 
83

 
79,913

 
56,637

 
37,856

Other cost of revenue:
 
 
 
 
 
Subscription business
11,005

 
8,118

 
6,412

Other business
5,118

 
3,430

 
51

 
16,123

 
11,548

 
6,463

Gross profit:
 
 
 
 
 
Subscription business
18,650

 
14,913

 
11,167

Other business
1,224

 
731

 
44

 
19,874

 
15,644

 
11,211

Sales and marketing
11,608

 
9,091

 
7,149

Technology and development
9,899

 
4,888

 
3,406

General and administrative
14,312

 
8,652

 
6,195

Operating loss
$
(15,945
)
 
$
(6,987
)
 
$
(5,539
)


The following table presents the Company’s revenue by geographic region of the member (in thousands):
 
 
YEARS ENDED DECEMBER 31,
 
2014
 
2013
 
2012
United States
$
86,494

 
$
58,847

 
$
34,611

Canada
29,416

 
24,982

 
20,919

Total revenue
$
115,910

 
$
83,829

 
$
55,530


Substantially all of the Company’s assets were located in the United States as of December 31, 2014 and 2013.
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. 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, 2014, the amount of dividends that may be paid by the Company’s insurance subsidiary to the Company without prior approval by regulatory authorities was approximately $0.04 million. During 2014, 2013 and 2012, the Company’s insurance subsidiary did not pay any dividends to the Company.                                
The statutory net income for 2014, 2013 and 2012 and statutory capital and surplus at December 31, 2014, 2013 and 2012, for the Company’s insurance subsidiary was as follows (in thousands):
 
 
 
AS OF DECEMBER 31,
 
 
2014
 
2013
 
2012
Statutory net income
 
$
990

 
$
1,126

 
$
1,266

Statutory capital and surplus
 
23,661

 
16,875

 
11,794


As of December 31, 2014, the Company’s insurance subsidiary maintained $23.7 million of statutory capital and surplus which was above the required amount of $22.6 million of statutory capital and surplus to avoid additional regulatory oversight. As of December 31, 2014 and 2013, the Company had $6.5 million and $6.5 million, respectively, on deposit with various states in which it writes policies.
Related Parties (Notes)
Related Party Transactions Disclosure [Text Block]
Related Parties
In March 2012, the Company issued a mortgage loan to an employee in the amount of $0.8 million. In November 2013, the loan was repaid in full.
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 2014, 2013 and 2012 were $0.3 million, $0.3 million and $0.3 million, respectively. As of December 31, 2014 and 2013, the Company owed the independent contractor $0.03 million and $0.03 million, respectively, in earned contractor fees.
Income Taxes (Notes)
Income Taxes
Income Taxes
Income (loss) before income taxes was as follows for the years ended December 31, 2014, 2013 and 2012 (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
United States
 
$
(21,371
)
 
$
(8,256
)
 
$
(6,522
)
Foreign
 
187

 
(11
)
 
196

 
 
$
(21,184
)
 
$
(8,267
)
 
$
(6,326
)








The components of income tax expense (benefit) were as follows (in thousands):
 
 
 
YEARS ENDED DECEMBER 31,
 
 
2014
 
2013
 
2012
Current:
 
 
 
 
 
 
U.S. federal & state
 
$
26

 
$
30

 
$
24

Foreign
 
(30
)
 
(122
)
 
60

 
 
(4
)
 
(92
)
 
84

Deferred:
 
 
 
 
 
 
U.S. federal & state
 

 

 

Foreign
 
(3
)
 

 

 
 
(3
)
 

 

Income tax (benefit) expense
 
$
(7
)
 
$
(92
)
 
$
84



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,    
 
 
2014
 
2013
 
2012
Federal income taxes at statutory rate
 
34.0
 %
 
34.0
 %
 
34.0
 %
Equity compensation
 
(0.9
)
 
(8.6
)
 
(8.5
)
Change in valuation allowance
 
(32.5
)
 
(25.1
)
 
(26.5