TRUPANION INC., 10-Q filed on 11/3/2017
Quarterly Report
Document and Entity Information Document
9 Months Ended
Sep. 30, 2017
Oct. 26, 2017
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-Q 
 
Document Period End Date
Sep. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
30,039,804 
Condensed Consolidated Statement of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]
 
 
 
 
Revenue
$ 63,118 
$ 48,359 
$ 176,122 
$ 136,890 
Cost of Revenue [Abstract]
 
 
 
 
Claims expenses
43,453 
34,253 
123,649 
97,323 
Other cost of revenue
7,858 
5,606 
21,160 
15,497 
Gross profit
11,807 
8,500 
31,313 
24,070 
Operating Expenses [Abstract]
 
 
 
 
Sales and marketing
4,862 
3,892 
13,323 
11,296 
Technology and Development
2,471 
2,339 
7,196 
6,790 
General and administrative
4,017 
3,811 
12,274 
11,028 
Total operating expenses
11,350 
10,042 
32,793 
29,114 
Operating income (loss)
457 
(1,542)
(1,480)
(5,044)
Interest expense
124 
66 
370 
137 
Other (income) expense, net
(99)
16 
(1,239)
(39)
Income (Loss) before income taxes
432 
(1,624)
(611)
(5,142)
Income tax expense
26 
13 
54 
31 
Net income (loss)
$ 406 
$ (1,637)
$ (665)
$ (5,173)
Net income (loss) per share [Abstract]
 
 
 
 
Earnings Per Share, Basic and Diluted
$ 0.01 
$ (0.06)
$ (0.02)
$ (0.18)
Weighted-average common shares outstanding
 
 
 
 
Weighted Average Number of Shares Outstanding, Basic
30,037,282 
28,732,417 
29,500,958 
28,362,084 
Weighted Average Number of Shares Outstanding, Diluted
33,113,981 
28,732,417 
29,500,958 
28,362,084 
Condensed Consolidated Statement of Comprehensive Income Statement (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income (loss)
$ 406 
$ (1,637)
$ (665)
$ (5,173)
Change in foreign currency translation adjustments
193 
(96)
317 
204 
Change in net gains on available-for-sale debt securities
25 
33 
Other comprehensive income (loss), net of taxes
194 
(71)
326 
237 
Comprehensive Income (Loss)
$ 600 
$ (1,708)
$ (339)
$ (4,936)
Condensed Consolidated Balance Sheet (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Assets [Abstract]
 
 
Cash and cash equivalents
$ 25,249 
$ 23,637 
Short-term Investments
34,031 
29,570 
Accounts and other receivables
20,315 
10,118 
Prepaid expenses and other assets
2,987 
2,062 
Total current assets
82,582 
65,387 
Restricted Cash
600 
600 
Long-Term Investments, at fair value
3,084 
2,579 
Equity Method Investments
271 
Property and equipment, net
7,958 
8,464 
Intangible assets, net
4,965 
4,910 
Other Long-Term Assets
2,739 
134 
Total assets
101,928 
82,345 
Liabilities and Equity [Abstract]
 
 
Accounts payable
2,327 
2,006 
Accrued liabilities and other current liabilities
7,813 
5,416 
Claims reserve
11,255 
9,521 
Deferred Revenue
22,656 
13,463 
Total current liabilities
44,051 
30,406 
Long-term debt
7,299 
4,767 
Deferred tax liabilities
1,623 
1,623 
Other liabilities
1,003 
834 
Total liabilities
53,976 
37,630 
Common stock
Preferred Stock
Additional paid-in capital
133,150 
129,574 
Accumulated other comprehensive loss
(51)
(377)
Accumulated deficit
(81,946)
(81,281)
Treasury stock, at cost
(3,201)
(3,201)
Stockholders' Equity Attributable to Parent
47,952 
44,715 
Total liabilities and stockholders' equity
$ 101,928 
$ 82,345 
Condensed Consolidated Balance Sheet Condensed Consolidated Balance Sheet Parentheticals (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Short-term Investments, Fair Value
$ 34,029 
$ 29,570 
Available-for-sale Securities, Amortized Cost Basis
$ 3,083 
$ 2,587 
Common Stock [Member]
 
 
Common Stock, Par or Stated Value Per Share
$ 0.00001 
$ 0.00001 
Common Stock, Shares Authorized
100,000,000 
100,000,000 
Common Stock, Shares, Issued
30,690,129 
30,156,247 
Common Stock, Shares, Outstanding
30,032,829 
29,498,947 
Preferred Stock [Member]
 
 
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
657,300 
657,300 
Condensed Consolidated Statement of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Net Cash Provided by Operating Activities [Abstract]
 
 
Net loss
$ (665)
$ (5,173)
Adjustments to Reconcile Net Income (Loss) to Cash Provided by (Used in) Operating Activities [Abstract]
 
 
Depreciation and Amortization
3,208 
2,617 
Stock-based compensation expense
2,564 
2,215 
Gain on Sale of Equity Investment
(1,036)
Other, Net
243 
218 
Increase (Decrease) in Operating Assets [Abstract]
 
 
Accounts and other receivables
(10,164)
(2,023)
Prepaid expenses and other assets
(297)
217 
Accounts Payable, Accrued Liabilities, and Other Liabilities
2,122 
(625)
Claims Reserve
1,639 
2,043 
Deferred revenue
9,075 
2,079 
Net cash provided by operating activities
6,689 
1,568 
Net Cash Provided by Investing Activities [Abstract]
 
 
Purchases of Investment Securities
(20,704)
(15,992)
Maturities of Investment Securities
15,878 
12,577 
Proceeds from Sale of Equity Method Investment
1,402 
Purchases of property and equipment
(2,247)
(1,546)
Other Investments
(2,762)
(130)
Net cash used in investing activities
(8,433)
(5,091)
Net Cash Provided by Financing Activities [Abstract]
 
 
Proceeds from exercise of stock options
2,082 
2,736 
Shares withheld to satisfy tax withholding
(1,170)
(662)
Proceeds from Debt financing, net of financing fees
2,420 
3,988 
Payments on Financing Obligation
(412)
(110)
Net cash provided by financing activities
2,920 
5,952 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net
436 
241 
Net Increase in Cash, Cash Equivalents, and Restricted Cash
1,612 
2,670 
Cash, Cash Equivalents, and Restricted Cash at beginning of period
24,237 
17,956 
Cash, Cash Equivalents, and Restricted Cash, End of Period
25,849 
20,626 
Supplemental Cash Flow Information [Abstract]
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
531 
81 
Property and Equipment Acquired Under Capital Leases
$ 689 
$ 615 
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Significant Accounting Policies
Description of Business and Basis of Presentation
Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the Company) provides medical insurance for cats and dogs throughout the United States, Canada and Puerto Rico.
The financial data as of December 31, 2016 was derived from the Company's audited consolidated financial statements. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and, in management's opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the U.S Securities and Exchange Commission on February 15, 2017 (the 2016 10-K). The Company's accounting policies are described in Note 1 to the financial statements included in the 2016 10-K. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period.
Reclassifications
Certain prior year amounts have been reclassified within the Company’s consolidated financial statements from their original presentation to conform to the current period presentation.
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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from such estimates. See Note 1 to the audited financial statements included in the 2016 10-K for additional discussion of these estimates and assumptions.
Accumulated Other Comprehensive Loss
There were no reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2017 and 2016.
Accounting Pronouncements Adopted During Period
In November 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) amending the accounting for income taxes and requiring all deferred tax assets and liabilities be classified as non-current in the consolidated balance sheets. The Company adopted this ASU as of January 1, 2017 and has retrospectively applied the provisions of this standard.
In March 2016, the FASB issued an ASU amending the accounting for employee share-based payments, including income tax recognition and classification. The Company adopted this ASU as of January 1, 2017. As a result, the Company has elected to use actual forfeitures in the estimate of stock-based compensation expense. Additionally, the guidance related to the accounting for excess tax benefits and deficiencies resulted in an initial adjustment as of January 1, 2017 to the Company's net operating loss deferred tax asset to eliminate the Company's existing windfall pool amounting to $4.3 million, which was offset by an adjustment to the Company's valuation allowance. Finally, tax withholding of shares will be allowed up to the employee's maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award, subject to the Company's internal policies for making this election.
Recent Accounting Pronouncements
In February 2016, the FASB issued an ASU amending the lease presentation guidance. The ASU requires organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheets. This ASU is effective for fiscal years beginning after December 15, 2018 including interim periods within that reporting period, with early adoption permitted. The Company plans to adopt this guidance as of January 1, 2019. The Company has determined this guidance will require recognition of a lease liability and corresponding asset on the consolidated balance sheets equal to the present value of minimum lease payments. The carrying amount of the asset is derived from the amount of the lease liability at the end of each reporting period. As of September 30, 2017 we are evaluating the impact of this on our consolidated financial statements and related disclosures.
Net Loss per Share
Earnings Per Share [Text Block]
Net Income (Loss) per Share
Basic net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated using the weighted-average number of shares of common stock plus, when dilutive, potential common shares outstanding using the treasury-stock method. Potential common shares outstanding include stock options, unvested restricted stock, and warrants.
The components of basic and diluted earnings per share were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share data)
Basic earnings per share:
 
 
 
 
 
 
 
Net income (loss)
$
406

 
$
(1,637
)
 
$
(665
)
 
$
(5,173
)
Shares used in computation:
 
 
 
 
 
 
 
Weighted average common shares outstanding
30,037,282

 
28,732,417

 
29,500,958

 
28,362,084

Basic earnings per share
$
0.01

 
$
(0.06
)
 
$
(0.02
)
 
$
(0.18
)
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Net income (loss)
$
406

 
$
(1,637
)
 
$
(665
)
 
$
(5,173
)
Shares used in computation:
 
 
 
 
 
 
 
Weighted average common shares outstanding
30,037,282

 
28,732,417

 
29,500,958

 
28,362,084

Stock options
2,618,567

 

 

 

Restricted stock units
919

 

 

 

Warrants
457,213

 

 

 

Weighted average number of shares
33,113,981

 
28,732,417

 
29,500,958

 
28,362,084

Diluted earnings per share
$
0.01

 
$
(0.06
)
 
$
(0.02
)
 
$
(0.18
)

The following potentially dilutive equity securities were not included in the diluted earnings per common share calculation because they would have had an antidilutive effect:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Stock options
480,360

 
4,354,494

 
4,118,884

 
4,354,949

Restricted stock awards and units

 
355,329

 
234,758

 
355,329

Warrants

 
869,999

 
810,000

 
869,999

Investment Securities (Notes)
Investment Securities
The amortized cost, gross unrealized holding gains and 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 September 30, 2017 and December 31, 2016 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
As of September 30, 2017
 
 
 
 
 
 
 
       Available-for-sale:
 
 
 
 
 
 
 
Foreign deposits
$
2,083

 
$

 
$

 
$
2,083

Municipal bond
1,000

 
1

 

 
1,001

 
$
3,083

 
$
1

 
$

 
$
3,084

       Short-term investments:
 
 
 
 
 
 
 
              U.S. treasury securities
$
5,787

 
$

 
$
(2
)
 
$
5,785

              Certificates of deposit
690

 

 

 
690

              U.S. government funds
27,554

 

 

 
27,554

 
$
34,031


$

 
$
(2
)

$
34,029

 
 
 
 
 
 
 
 
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
As of December 31, 2016
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Foreign deposits
$
1,587

 
$

 
$

 
$
1,587

Municipal bond
1,000

 

 
(8
)
 
992

 
$
2,587


$

 
$
(8
)

$
2,579

Short-term investments:
 
 
 
 
 
 
 
U.S. treasury securities
$
5,791

 
$

 
$

 
$
5,791

Certificates of deposit
707

 

 

 
707

U.S. government funds
23,072

 

 

 
23,072

 
$
29,570


$

 
$


$
29,570


Maturities of debt securities classified as available-for-sale were as follows (in thousands):
 
September 30, 2017
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
Due after one year through five years
$
2,083

 
$
2,083

Due after five years through ten years
1,000

 
1,001

 
$
3,083

 
$
3,084


The Company evaluated its securities for other-than-temporary impairment and considers the decline in market value for the securities to be primarily attributable to current economic and market conditions. For debt securities, the Company does not intend to sell, nor is it more likely than not that the Company will be required to sell, the securities prior to the recovery of the amortized cost basis which may be at maturity.
The amortized cost, gross unrealized holding gains and 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 September 30, 2017 and December 31, 2016 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
As of September 30, 2017
 
 
 
 
 
 
 
       Available-for-sale:
 
 
 
 
 
 
 
Foreign deposits
$
2,083

 
$

 
$

 
$
2,083

Municipal bond
1,000

 
1

 

 
1,001

 
$
3,083

 
$
1

 
$

 
$
3,084

       Short-term investments:
 
 
 
 
 
 
 
              U.S. treasury securities
$
5,787

 
$

 
$
(2
)
 
$
5,785

              Certificates of deposit
690

 

 

 
690

              U.S. government funds
27,554

 

 

 
27,554

 
$
34,031


$

 
$
(2
)

$
34,029

 
 
 
 
 
 
 
 
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
As of December 31, 2016
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Foreign deposits
$
1,587

 
$

 
$

 
$
1,587

Municipal bond
1,000

 

 
(8
)
 
992

 
$
2,587


$

 
$
(8
)

$
2,579

Short-term investments:
 
 
 
 
 
 
 
U.S. treasury securities
$
5,791

 
$

 
$

 
$
5,791

Certificates of deposit
707

 

 

 
707

U.S. government funds
23,072

 

 

 
23,072

 
$
29,570


$

 
$


$
29,570

Fair Value
Fair Value Disclosures [Text Block]
Fair Value
The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring basis, and placement within the fair value hierarchy (in thousands):
 
As of September 30, 2017
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
Restricted cash
$
600

 
$
600

 
$

Foreign deposits
2,083

 
2,083

 

Municipal bond
1,001

 

 
1,001

Money market funds
5,679

 
5,679

 

Total
$
9,363

 
$
8,362

 
$
1,001

 
 
 
 
 
 
 
As of December 31, 2016
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
Restricted cash
$
600

 
$
600

 
$

Foreign deposits
1,587

 
1,587

 

Municipal bond
992

 

 
992

Money market funds
7,033

 
7,033

 

Total
$
10,212

 
$
9,220

 
$
992


The Company measures the fair value of restricted cash, foreign deposits, and money market funds based on quoted prices in active markets for identical assets. The fair value of the municipal bond is based on either recent trades in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.
As of September 30, 2017, the Company's other long-term assets balance included a $2.6 million note receivable, recorded at its estimated collectible amount, plus accrued interest. The Company estimates that the carrying value of the note receivable approximates the fair value. The estimated fair value represents a Level 3 measurement within the fair value hierarchy, and is based on market interest rates and the assessed creditworthiness of the third party.
The Company estimates the fair value of long-term debt based upon rates currently available to the Company for debt with similar terms and remaining maturities. This is a Level 3 measurement. Based upon the terms of the debt, the carrying amount of long-term debt approximated fair value at September 30, 2017 and December 31, 2016.
Debt
Debt Disclosure [Text Block]
Debt
The Company has a revolving line of credit of up to $30.0 million, secured by any and all interests in the Company's assets that are not otherwise restricted. Interest on the revolving line of credit is payable monthly at the greater of 4.5%, or 1.25% plus the prime rate. The borrowing agreement includes other ancillary services and letters of credit of up to $4.5 million and $3.0 million as of September 30, 2017 and December 31, 2016, respectively. The facility also requires a deposit of restricted cash of $0.6 million. The agreement was amended during the current year to extend the maturity date to December 2019. The credit agreement requires the Company to comply with various financial and non-financial covenants. As of September 30, 2017 and December 31, 2016, the Company was in compliance with all covenants.
Borrowings on the revolving line of credit are limited to the lesser of $30.0 million and the total amount of cash and securities held by the Company's insurance subsidiaries (American Pet Insurance Company and Wyndham Insurance Company (SAC) Limited Segregated Account AX). As of September 30, 2017, available borrowing capacity on the line of credit was $21.0 million, with an outstanding balance of $1.5 million for ancillary services and letters of credit, and borrowings under the facility of $7.5 million, recorded net of financing fees of $0.2 million.
Commitment and Contingencies
Commitments and Contingencies Disclosure [Text Block]
Commitments and Contingencies
From time to time, the Company is subject to litigation matters and claims arising from the ordinary course of business. The Company records a provision for a liability relating to legal matters when it is both probable that a material liability has been incurred and the amount of the loss can be reasonably estimated. At this time, the Company does not believe any such matters to be material individually or in the aggregate. These views are subject to change following the outcome of future events or the results of future developments.
Stock-based Compensation
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
Stock-Based Compensation
The following table presents information regarding stock options granted, exercised and forfeited for the periods presented:
 
Number Of Options
 
Weighted-Average Exercise Price
 
Aggregate Intrinsic Value
 
 
 
 
 
(in thousands)
Outstanding as of December 31, 2016
4,123,023

 
$
5.06

 
$
43,185

Granted
648,589

 
17.61

 
 
Exercised
(581,865
)
 
3.58

 
8,134

Forfeited
(70,863
)
 
11.56

 
 
Outstanding as of September 30, 2017
4,118,884

 
7.13

 
79,408

 
 
 
 
 
 
Vested and Exercisable at September 30, 2017
2,975,063

 
$
4.23

 
$
65,994


As of September 30, 2017, the stock options outstanding had a weighted-average remaining contractual life of 5.7 years.
Stock-based compensation expense includes stock options and restricted stock awards and units granted to employees and non-employees and has been reported in the Company’s consolidated statements of operations as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Claims expenses
$
101

 
$
74

 
$
260

 
$
189

Other cost of revenue
69

 
9

 
172

 
26

Sales and marketing
165

 
172

 
550

 
419

Technology and development
57

 
67

 
166

 
158

General and administrative
503

 
454

 
1,416

 
1,423

Total stock-based compensation expense
$
895

 
$
776

 
$
2,564

 
$
2,215


As of September 30, 2017, for all employees, the Company had 1,124,951 unvested stock options and 234,758 restricted stock awards and units that are expected to vest. Total stock-based compensation cost of $6.8 million related to unvested awards not yet recognized is expected to be recognized over a weighted-average period of approximately 2.8 years.
Claims Reserve
Supplementary Insurance Information, for Insurance Companies Disclosure [Text Block]
Claims Reserve
The claims reserve includes unpaid claims and claims adjustment expenses and an estimate of claims that have been incurred but not yet reported (IBNR) to the Company. The estimate, which involves actuarial projections, is based on management's assessment of facts and circumstances currently known, and assumptions about anticipated claims patterns, including expected future trends in the size and frequency of the average claim. Reserve estimates are continually refined as claims are reported and settled. Changes in management's assumptions and estimates may have a relatively large impact to the claims reserve and associated expense.
This estimate is made for each of the Company's 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.
Summarized below are the changes in the total liability for the Company's subscription business segment:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(in thousands)
Claims reserve at beginning of year
 
$
8,538

 
$
5,384

Claims incurred during the period related to:
 
 
 
 
Current year
 
113,833

 
90,188

Prior years
 
(85
)
 
521

Total claims incurred
 
113,748

 
90,709

Claims paid during period related to:
 
 
 
 
Current year
 
104,501

 
82,761

Prior years
 
7,533

 
5,681

Total claims paid
 
112,034

 
88,442

Non-cash claims expense
 
306

 
279

Claims reserve at end of period
 
$
9,946

 
$
7,372


The Company’s claim reserve for the subscription business segment increased $1.4 million from $8.5 million at December 31, 2016 to $9.9 million at September 30, 2017. This change was comprised of $113.7 million in claims expense incurred during the period less $112.0 million in claims expense paid during the period. The $113.7 million in claims expense incurred includes a reduction of $0.1 million to the reserves relating to prior years, which is the result of ongoing analysis of recent claims trends. 
Summarized below are the changes in total liability for the Company's other business segment:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(in thousands)
Claims reserve at beginning of year
 
$
983

 
$
890

Claims incurred during the period related to:
 
 
 
 
Current year
 
10,074

 
6,718

Prior years
 
(173
)
 
(104
)
Total claims incurred
 
9,901

 
6,614

Claims paid during period related to:
 
 
 
 
Current year
 
8,786

 
5,765

Prior years
 
789

 
749

Total claims paid
 
9,575

 
6,514

Non-cash claims expense
 

 

Claims reserve at end of period
 
$
1,309

 
$
990


The Company’s claim reserve for the other business segment increased $0.3 million from $1.0 million at December 31, 2016 to $1.3 million at September 30, 2017. This change was comprised of $9.9 million in claims expense incurred during the period less $9.6 million in claims expense paid during the period. The $9.9 million in claims expense incurred includes a reduction of $0.2 million to the reserves relating to prior years, which is the result of ongoing analysis of recent claims trends. 


Claims Reserve by Loss Year
The total claims reserve as of September 30, 2017 for the subscription business segment relates to activity incurred during the years as follows (in thousands):
 
As of September 30, 2017
Year Incurred
 
2015
$
192

2016
727

2017
9,027

 
$
9,946

The total claims reserve as of September 30, 2017 for the other business segment relates to activity incurred during the years as follows (in thousands):
 
As of September 30, 2017
Year Incurred
 
2015
$
2

2016
19

2017
1,288

 
$
1,309

Equity Method Investment (Notes)
Equity Method Investments [Table Text Block]
Equity Method Investment
In June 2017, the Company sold its share of an investment previously accounted for under the equity method. The sale resulted in a gain of $1.0 million recorded within other income on the consolidated statement of operations for the nine months ended September 30, 2017.
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.
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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Subscription business
$
56,493

 
$
44,629

 
$
159,363

 
$
125,934

Other business
6,625

 
3,730

 
16,759

 
10,956

 
63,118

 
48,359

 
176,122

 
136,890

Claims expenses:
 
 
 
 
 
 
 
Subscription business
39,761

 
32,088

 
113,748

 
90,709

Other business
3,692

 
2,165

 
9,901

 
6,614

 
43,453

 
34,253

 
123,649

 
97,323

Other cost of revenue:
 
 
 
 
 
 
 
Subscription business
5,454

 
4,344

 
15,304

 
12,084

Other business
2,404

 
1,262

 
5,856

 
3,413

 
7,858

 
5,606

 
21,160

 
15,497

Gross profit:
 
 
 
 
 
 
 
Subscription business
11,278

 
8,197

 
30,311

 
23,141

Other business
529


303

 
1,002

 
929

 
11,807


8,500

 
31,313

 
24,070

Sales and marketing:
 
 
 
 
 
 
 
Subscription business
4,811

 
3,829

 
13,161

 
11,140

Other business
51

 
63

 
162

 
156

 
4,862

 
3,892

 
13,323

 
11,296

Technology and development
2,471

 
2,339

 
7,196

 
6,790

General and administrative
4,017

 
3,811

 
12,274

 
11,028

Operating income (loss)
$
457


$
(1,542
)
 
$
(1,480
)
 
$
(5,044
)

The following table presents the Company’s revenue by geographic region of the member (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
United States
$
50,506

 
$
38,799

 
$
141,946

 
$
110,024

Canada
12,612

 
9,560

 
34,176

 
26,866

Total revenue
$
63,118

 
$
48,359

 
$
176,122

 
$
136,890


Substantially all of the Company’s long-lived assets were located in the United States as of September 30, 2017 and December 31, 2016.
Nature of Operations and Summary of Significant Accounting Policies (Policies)
Description of Business and Basis of Presentation
Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the Company) provides medical insurance for cats and dogs throughout the United States, Canada and Puerto Rico.
The financial data as of December 31, 2016 was derived from the Company's audited consolidated financial statements. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and, in management's opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the U.S Securities and Exchange Commission on February 15, 2017 (the 2016 10-K). The Company's accounting policies are described in Note 1 to the financial statements included in the 2016 10-K. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period.
Reclassifications
Certain prior year amounts have been reclassified within the Company’s consolidated financial statements from their original presentation to conform to the current period presentation.
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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from such estimates. See Note 1 to the audited financial statements included in the 2016 10-K for additional discussion of these estimates and assumptions.
Accumulated Other Comprehensive Loss
There were no reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2017 and 2016.
Accounting Pronouncements Adopted During Period
In November 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) amending the accounting for income taxes and requiring all deferred tax assets and liabilities be classified as non-current in the consolidated balance sheets. The Company adopted this ASU as of January 1, 2017 and has retrospectively applied the provisions of this standard.
In March 2016, the FASB issued an ASU amending the accounting for employee share-based payments, including income tax recognition and classification. The Company adopted this ASU as of January 1, 2017. As a result, the Company has elected to use actual forfeitures in the estimate of stock-based compensation expense. Additionally, the guidance related to the accounting for excess tax benefits and deficiencies resulted in an initial adjustment as of January 1, 2017 to the Company's net operating loss deferred tax asset to eliminate the Company's existing windfall pool amounting to $4.3 million, which was offset by an adjustment to the Company's valuation allowance. Finally, tax withholding of shares will be allowed up to the employee's maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award, subject to the Company's internal policies for making this election.
Recent Accounting Pronouncements
In February 2016, the FASB issued an ASU amending the lease presentation guidance. The ASU requires organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheets. This ASU is effective for fiscal years beginning after December 15, 2018 including interim periods within that reporting period, with early adoption permitted. The Company plans to adopt this guidance as of January 1, 2019. The Company has determined this guidance will require recognition of a lease liability and corresponding asset on the consolidated balance sheets equal to the present value of minimum lease payments. The carrying amount of the asset is derived from the amount of the lease liability at the end of each reporting period. As of September 30, 2017 we are evaluating the impact of this on our consolidated financial statements and related disclosures.
Fair Value Notes Receivable (Policies)
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
As of September 30, 2017, the Company's other long-term assets balance included a $2.6 million note receivable, recorded at its estimated collectible amount, plus accrued interest. The Company estimates that the carrying value of the note receivable approximates the fair value. The estimated fair value represents a Level 3 measurement within the fair value hierarchy, and is based on market interest rates and the assessed creditworthiness of the third party.
Claims Reserve Claims Reserve (Policies)
Liability Reserve Estimate, Policy [Policy Text Block]
The claims reserve includes unpaid claims and claims adjustment expenses and an estimate of claims that have been incurred but not yet reported (IBNR) to the Company. The estimate, which involves actuarial projections, is based on management's assessment of facts and circumstances currently known, and assumptions about anticipated claims patterns, including expected future trends in the size and frequency of the average claim. Reserve estimates are continually refined as claims are reported and settled. Changes in management's assumptions and estimates may have a relatively large impact to the claims reserve and associated expense.
Net Loss per Share (Tables)
The components of basic and diluted earnings per share were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share data)
Basic earnings per share:
 
 
 
 
 
 
 
Net income (loss)
$
406

 
$
(1,637
)
 
$
(665
)
 
$
(5,173
)
Shares used in computation:
 
 
 
 
 
 
 
Weighted average common shares outstanding
30,037,282

 
28,732,417

 
29,500,958

 
28,362,084

Basic earnings per share
$
0.01

 
$
(0.06
)
 
$
(0.02
)
 
$
(0.18
)
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Net income (loss)
$
406

 
$
(1,637
)
 
$
(665
)
 
$
(5,173
)
Shares used in computation:
 
 
 
 
 
 
 
Weighted average common shares outstanding
30,037,282

 
28,732,417

 
29,500,958

 
28,362,084

Stock options
2,618,567

 

 

 

Restricted stock units
919

 

 

 

Warrants
457,213

 

 

 

Weighted average number of shares
33,113,981

 
28,732,417

 
29,500,958

 
28,362,084

Diluted earnings per share
$
0.01

 
$
(0.06
)
 
$
(0.02
)
 
$
(0.18
)
The following potentially dilutive equity securities were not included in the diluted earnings per common share calculation because they would have had an antidilutive effect:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Stock options
480,360

 
4,354,494

 
4,118,884

 
4,354,949

Restricted stock awards and units

 
355,329

 
234,758

 
355,329

Warrants

 
869,999

 
810,000

 
869,999

Investment Securities Available-for-Sale (Tables)
The amortized cost, gross unrealized holding gains and 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 September 30, 2017 and December 31, 2016 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
As of September 30, 2017
 
 
 
 
 
 
 
       Available-for-sale:
 
 
 
 
 
 
 
Foreign deposits
$
2,083

 
$

 
$

 
$
2,083

Municipal bond
1,000

 
1

 

 
1,001

 
$
3,083

 
$
1

 
$

 
$
3,084

       Short-term investments:
 
 
 
 
 
 
 
              U.S. treasury securities
$
5,787

 
$

 
$
(2
)
 
$
5,785

              Certificates of deposit
690

 

 

 
690

              U.S. government funds
27,554

 

 

 
27,554

 
$
34,031


$

 
$
(2
)

$
34,029

 
 
 
 
 
 
 
 
 
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Fair
Value
As of December 31, 2016
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Foreign deposits
$
1,587

 
$

 
$

 
$
1,587

Municipal bond
1,000

 

 
(8
)
 
992

 
$
2,587


$

 
$
(8
)

$
2,579

Short-term investments:
 
 
 
 
 
 
 
U.S. treasury securities
$
5,791

 
$

 
$

 
$
5,791

Certificates of deposit
707

 

 

 
707

U.S. government funds
23,072

 

 

 
23,072

 
$
29,570


$

 
$


$
29,570

Maturities of debt securities classified as available-for-sale were as follows (in thousands):
 
September 30, 2017
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
Due after one year through five years
$
2,083

 
$
2,083

Due after five years through ten years
1,000

 
1,001

 
$
3,083

 
$
3,084

Fair Value (Tables)
Fair value, asset & liabilities measured on recurring basis [Table Text Block]
The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring basis, and placement within the fair value hierarchy (in thousands):
 
As of September 30, 2017
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
Restricted cash
$
600

 
$
600

 
$

Foreign deposits
2,083

 
2,083

 

Municipal bond
1,001

 

 
1,001

Money market funds
5,679

 
5,679

 

Total
$
9,363

 
$
8,362

 
$
1,001

 
 
 
 
 
 
 
As of December 31, 2016
 
Fair Value
 
Level 1
 
Level 2
Assets
 
 
 
 
 
Restricted cash
$
600

 
$
600

 
$

Foreign deposits
1,587

 
1,587

 

Municipal bond
992

 

 
992

Money market funds
7,033

 
7,033

 

Total
$
10,212

 
$
9,220

 
$
992

Stock-based Compensation (Tables)
The following table presents information regarding stock options granted, exercised and forfeited for the periods presented:
 
Number Of Options
 
Weighted-Average Exercise Price
 
Aggregate Intrinsic Value
 
 
 
 
 
(in thousands)
Outstanding as of December 31, 2016
4,123,023

 
$
5.06

 
$
43,185

Granted
648,589

 
17.61

 
 
Exercised
(581,865
)
 
3.58

 
8,134

Forfeited
(70,863
)
 
11.56

 
 
Outstanding as of September 30, 2017
4,118,884

 
7.13

 
79,408

 
 
 
 
 
 
Vested and Exercisable at September 30, 2017
2,975,063

 
$
4.23

 
$
65,994

Stock-based compensation expense includes stock options and restricted stock awards and units granted to employees and non-employees and has been reported in the Company’s consolidated statements of operations as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Claims expenses
$
101

 
$
74

 
$
260

 
$
189

Other cost of revenue
69

 
9

 
172

 
26

Sales and marketing
165

 
172

 
550

 
419

Technology and development
57

 
67

 
166

 
158

General and administrative
503

 
454

 
1,416

 
1,423

Total stock-based compensation expense
$
895

 
$
776

 
$
2,564

 
$
2,215

Claims Reserve (Tables)
Summarized below are the changes in the total liability for the Company's subscription business segment:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(in thousands)
Claims reserve at beginning of year
 
$
8,538

 
$
5,384

Claims incurred during the period related to:
 
 
 
 
Current year
 
113,833

 
90,188

Prior years
 
(85
)
 
521

Total claims incurred
 
113,748

 
90,709

Claims paid during period related to:
 
 
 
 
Current year
 
104,501

 
82,761

Prior years
 
7,533

 
5,681

Total claims paid
 
112,034

 
88,442

Non-cash claims expense
 
306

 
279

Claims reserve at end of period
 
$
9,946

 
$
7,372


The Company’s claim reserve for the subscription business segment increased $1.4 million from $8.5 million at December 31, 2016 to $9.9 million at September 30, 2017. This change was comprised of $113.7 million in claims expense incurred during the period less $112.0 million in claims expense paid during the period. The $113.7 million in claims expense incurred includes a reduction of $0.1 million to the reserves relating to prior years, which is the result of ongoing analysis of recent claims trends. 
Summarized below are the changes in total liability for the Company's other business segment:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(in thousands)
Claims reserve at beginning of year
 
$
983

 
$
890

Claims incurred during the period related to:
 
 
 
 
Current year
 
10,074

 
6,718

Prior years
 
(173
)
 
(104
)
Total claims incurred
 
9,901

 
6,614

Claims paid during period related to:
 
 
 
 
Current year
 
8,786

 
5,765

Prior years
 
789

 
749

Total claims paid
 
9,575

 
6,514

Non-cash claims expense
 

 

Claims reserve at end of period
 
$
1,309

 
$
990


The Company’s claim reserve for the other business segment increased $0.3 million from $1.0 million at December 31, 2016 to $1.3 million at September 30, 2017. This change was comprised of $9.9 million in claims expense incurred during the period less $9.6 million in claims expense paid during the period. The $9.9 million in claims expense incurred includes a reduction of $0.2 million to the reserves relating to prior years, which is the result of ongoing analysis of recent claims trends. 

The total claims reserve as of September 30, 2017 for the subscription business segment relates to activity incurred during the years as follows (in thousands):
 
As of September 30, 2017
Year Incurred
 
2015
$
192

2016
727

2017
9,027

 
$
9,946

The total claims reserve as of September 30, 2017 for the other business segment relates to activity incurred during the years as follows (in thousands):
 
As of September 30, 2017
Year Incurred
 
2015
$
2

2016
19

2017
1,288

 
$
1,309

Segments (Tables)
Revenue and gross profit of the Company’s segments were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Subscription business
$
56,493

 
$
44,629

 
$
159,363

 
$
125,934

Other business
6,625

 
3,730

 
16,759

 
10,956

 
63,118

 
48,359

 
176,122

 
136,890

Claims expenses:
 
 
 
 
 
 
 
Subscription business
39,761

 
32,088

 
113,748

 
90,709

Other business
3,692

 
2,165

 
9,901

 
6,614

 
43,453

 
34,253

 
123,649

 
97,323

Other cost of revenue:
 
 
 
 
 
 
 
Subscription business
5,454

 
4,344

 
15,304

 
12,084

Other business
2,404

 
1,262

 
5,856

 
3,413

 
7,858

 
5,606

 
21,160

 
15,497

Gross profit:
 
 
 
 
 
 
 
Subscription business
11,278

 
8,197

 
30,311

 
23,141

Other business
529


303

 
1,002

 
929

 
11,807


8,500

 
31,313

 
24,070

Sales and marketing:
 
 
 
 
 
 
 
Subscription business
4,811

 
3,829

 
13,161

 
11,140

Other business
51

 
63

 
162

 
156

 
4,862

 
3,892

 
13,323

 
11,296

Technology and development
2,471

 
2,339

 
7,196

 
6,790

General and administrative
4,017

 
3,811

 
12,274

 
11,028

Operating income (loss)
$
457


$
(1,542
)
 
$
(1,480
)
 
$
(5,044
)
The following table presents the Company’s revenue by geographic region of the member (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
United States
$
50,506

 
$
38,799

 
$
141,946

 
$
110,024

Canada
12,612

 
9,560

 
34,176

 
26,866

Total revenue
$
63,118

 
$
48,359

 
$
176,122

 
$
136,890

Nature of Operations and Summary of Significant Accounting Policies (Details) Narrative (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]
 
 
 
 
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax
$ 0 
$ 0 
$ 0 
$ 0 
New Accounting Pronouncement or Change in Accounting Principle, Effect of Adoption, Quantification
 
 
$ 4.3 
 
Net Loss per Share (Details) Computation of Net Income (Loss) Per Share (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Schedule of Earnings Per Share, Basic and Diluted, by Common Class [Line Items]
 
 
 
 
Net income (loss)
$ 406 
$ (1,637)
$ (665)
$ (5,173)
Weighted Average Number of Shares Outstanding, Basic
30,037,282 
28,732,417 
29,500,958 
28,362,084 
Weighted Average Number of Shares Outstanding, Diluted
33,113,981 
28,732,417 
29,500,958 
28,362,084 
Earnings Per Share [Abstract]
 
 
 
 
Earnings Per Share, Basic
$ 0.01 
$ (0.06)
$ (0.02)
$ (0.18)
Earnings Per Share, Diluted
$ 0.01 
$ (0.06)
$ (0.02)
$ (0.18)
Employee Stock Option [Member]
 
 
 
 
Schedule of Earnings Per Share, Basic and Diluted, by Common Class [Line Items]
 
 
 
 
Weighted Average Number Diluted Shares Outstanding Adjustment
2,618,567 
Restricted Stock Units (RSUs) [Member]
 
 
 
 
Schedule of Earnings Per Share, Basic and Diluted, by Common Class [Line Items]
 
 
 
 
Weighted Average Number Diluted Shares Outstanding Adjustment
919 
Warrant [Member]
 
 
 
 
Schedule of Earnings Per Share, Basic and Diluted, by Common Class [Line Items]
 
 
 
 
Weighted Average Number Diluted Shares Outstanding Adjustment
457,213 
Net Loss per Share (Details) Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Employee Stock Option [Member]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount
480,360 
4,354,494 
4,118,884 
4,354,949 
Restricted Stock Units (RSUs) [Member]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount
355,329 
234,758 
355,329 
Warrant [Member]