2015 ANNUAL REPORT
2015
TO OUR SHAREHOLDERS
I am pleased to report that 2015 went as planned. It was a good year and one that I
am proud of. More importantly, we are well on our way to meeting the commitments
outlined in my (cid:191)rst shareholder letter from last year. (cid:11)I wrote this year(cid:182)s letter with
the expectation that you have previously read my introductory public shareholder
letter, which described how we operate and think about our business. If you have not
previously had an opportunity to review it or if you would like a refresher, you will
(cid:191)nd it attached(cid:12).
2015 ended with more (cid:55)erritory (cid:51)artners out in the (cid:191)eld, calling on the largest
number of active hospitals in our history. We have more pets enrolled, and they
are loyal — staying with us longer than ever. The number of Trupanion ExpressTM
hospitals grew from 89 at our initial public offering in July 2014 to over 500 at the
end of 2015. Most importantly, we helped more pet owners and their beloved pets
receive the best veterinary care.
From my perspective, Trupanion continues to lead the creation of this new
category of “medical insurance for cats and dogs” in North America. We are not
“pet insurance,” we are different. To be blunt, we agree with pet owners and
veterinarians that the traditional “pet insurance” is broken.
Trupanion stands apart as Medical Insurance for Cat and Dogs. As a reminder, we
have no caps or limits, cover all congenital and hereditary conditions, and never
penalize pet owners making a claim or for their pets having a birthday. While our
policies are lifelong, they can be canceled any month only by the pet owner (cid:11)unless
fraud is involved(cid:12). (cid:50)ur rates within a sub category go up or down to maintain our
target of spending 70 cents of every dollar collected to pay veterinary invoices.
These sub category prices go up and down constantly for new pets and are trued up
for existing pets on the anniversary of their enrollment. Examples of subcategories
include: cat, dog, age at enrollment, local cost of veterinary care, and deductible
amount if a member chooses to have one.
We remain on target to achieve operational scale per the timeline described in our
2014 shareholder letter. As a reminder, we de(cid:191)ne scale as (cid:25)50,000 to 750,000 pets,
5(cid:8) (cid:191)xed expenses,1 and a 15% adjusted operating margin.2 At scale, we anticipate
this operating income will drive continued growth, funding new pet acquisitions
and providing for our future capital requirements.
I remain committed to updating you on our progress toward our goals every year.
Now, let(cid:182)s move on to our 2015 results.
2015 Financial Performance
This is how we think about our (cid:191)nancial performance in 2015.3 (cid:50)ur total revenue was (cid:7)147.0
million. We spent (cid:7)103.1 million paying our members(cid:182) veterinary invoices and an additional
(cid:7)18.4 million in variable expenses4 supporting our members, leaving us with gross pro(cid:191)t of (cid:7)25.5
million.5 (cid:50)ur (cid:191)xed expenses were an additional (cid:7)21.9 million, leaving us with (cid:7)3.(cid:25) million in
adjusted operating income. We chose to invest (cid:7)14.8 million to add new pets during the year.
(cid:54)ubtracting this acquisition cost investment from our (cid:7)3.(cid:25) million adjusted operating income
yielded an adjusted E(cid:37)ITDA loss of (cid:7)11 million.(cid:25)
Table 1 shows the progress of our key growth factors and cash balance minus debt.
TABLE 1. KEY GROWTH FACTORS
Year
Total
Enrolled
Pets
Total
Revenue
YoY
Revenue
Growth
Adjusted
Operating
Income
Adjusted
Operating
Income
Margin
Invested Capital
for Acquiring
New Pets
(Acquisition Cost)
Cash and
Short Term
Investments,
Minus Debt
2012
125,387
$55.5M
2013
182,497
$83.8M
50%
51%
2014
232,450
$115.9M 38%
2015
291,818
$147.0M 27%
$3.0M
$4.3M
$0.9M
$3.6M
5.4%
5.1%
0.8%
2.4%
$6.7M
$8.4M
$11.1M
$14.8M
$5.1M
$7.9M
$60.6M
$43.2M
As we continue to grow this category, we are most focused on increasing scale in our adjusted
operating income while maintaining a high LVP:PAC ratio, which we target at 5:1. At this stage in
our development, we believe these metrics are our best proxy to track changes in shareholder value
creation. (cid:50)ver time, I expect we will transition from the LVP:PAC ratio to more of an I(cid:53)(cid:53) analysis
as our (cid:191)xed expenses and adjusted operating income begin to bene(cid:191)t from scale.7
Adjusted Operating Income
In the second half of 2015, we made signi(cid:191)cant
progress toward our long-term adjusted
operating margin target of 15%. Previously,
we labeled our adjusted operating margin
as our “discretionary margin,” which was
our non-GAAP term that describes the
operating income from our existing members
before any costs to acquire new pets. In
2014, this margin was less than 1%, due in
large part to our signi(cid:191)cant investments in
Trupanion ExpressTM. As we moved beyond the
development phase of Trupanion ExpressTM
in the second half of 2015, we began to make
progress toward achieving scale in our adjusted
operating margin. For the full year of 2015 it
grew to 2.4%, but in (cid:52)3 and (cid:52)4 speci(cid:191)cally, it
trended up to 2.2% and 5.(cid:25)% respectively.
We expect to achieve our stated goal of a 15%
adjusted operating margin once we reach
operational scale at (cid:25)50,000 to 750,000 total
enrolled pets. At operational scale, we expect
our “C(cid:50)G(cid:54)” and variable expenses to comprise
70% and 10% of total revenue respectively
(cid:11)their historic averages(cid:12) and our (cid:191)xed expenses
to comprise 5% of total revenue, signi(cid:191)cantly
2015 SHAREHOLDER LETTER
TRUPANION • 2
below today(cid:182)s level. (cid:53)educing our (cid:191)xed
expenses is our biggest opportunity to expand
our adjusted operating margin from
current levels.
In 2015, we spent (cid:7)22 million, or 15% of
revenues, on our (cid:191)xed expenses. This is a far
cry from our target of 5%. (cid:50)ur (cid:191)xed expenses
break down into three buckets:
$13 million spend in G&A;
$5 million spend in our core
technology; and
$4 million ($7M total, $3M
capitalized) investment to
complete the development
of Trupanion ExpressTM.
The recurring portion of these expenses
(cid:11)excluding the development of Trupanion
ExpressTM(cid:12) was (cid:7)18 million.
Moving forward, our strategy is to grow (cid:191)xed
expenses modestly — approximating 5%
annually. We believe this will be an appropriate
level of investment to maintain our category
leadership, which is our primary priority. The
math works this way: after 5 years of annual
5% increases, the (cid:191)xed expenses would grow
from (cid:7)18 million to (cid:7)23 million. During the
same time, our top line revenue is expected to
grow at a much faster rate. If after 5 years our
revenue reaches (cid:7)4(cid:25)0 million and our (cid:191)xed
expenses are (cid:7)23 million, then we would meet
our target. While it(cid:182)s clear what we need to do
to achieve a 15% operating margin goal, it will
require scale, commitment, and discipline
to execute.
We expect our adjusted operating income to
organically fund our annual revenue growth in
the range of 20% to 30%. It will not be enough
to fund our growth in the range of 40% to 50%
at our target 5:1 LVP:PAC ratio. This higher
growth rate would require us to raise more
capital, which would be dilutive and therefore,
we believe, counterproductive to value creation.
Hence, we intend to deliberately grow at 20%
to 30% per year. The limiting factors for larger
growth are the time to become cash (cid:192)ow
positive on the addition of a new pet and the
fact that as we add revenue, we need to set
aside cash for surplus capital.
Value Creation
Monitoring our dilution levels is another key
area of focus for me. (cid:50)ur IP(cid:50) in July of 2014
was intended to generate enough cash to fund
us to the point of being cash (cid:192)ow positive, and
we remain on course to deliver on this goal in
the second or third quarter of 201(cid:25). My crystal
ball tells me that it(cid:182)s going to be tight in the
second quarter, but the third quarter should be
doable. (cid:53)egardless of which quarter in 201(cid:25) we
become cash (cid:192)ow positive, we should not need
to further dilute the value of our shareholders(cid:182)
positions with another equity raise unless the
world changes dramatically from what we(cid:182)re
seeing now or a compelling new opportunity
presents itself. Each member of our team,
full-time and part-time, receives stock options
in Trupanion. Team participation in our
equity program is another key priority of ours,
aligning us all in our objective to maximize
future value creation with limited dilution. If
the stock options issued under this program are
exercised, the company receives the cash from
the strike price. If options are not exercised,
the dilution is less.
3 • TRUPANION
2015 SHAREHOLDER LETTER
Table 2 highlights our historic (cid:191)nancial performance on a per-share basis. As you can see, our
revenue per share has grown year over year, while our adjusted operating income has jumped
around, due primarily to our expenditures on Trupanion ExpressTM.
TABLE 2. HISTORIC FINANCIAL PERFORMANCE
Year
Total Share Count (including
options and outstanding
shares with warrants
and granted options)
Revenue
Per Share
YoY Growth Adjusted Operating
YoY Growth
Income Per Share
2012
22,467,205
2013
25,611,542
2014
34,406,121
2015
34,610,521
$2.47
$3.27
$3.37
$4.25
53%
32%
3%
26%
$0.13
$0.17
$0.03
$0.10
-7%
31%
-82%
233%
2015 Operational Performance
We have now completed the development
phase of Trupanion ExpressTM, our software
technology designed to eliminate the
traditional “reimbursement model” by enabling
us to pay more veterinary invoices directly to
treating veterinarians. Why is this important?
For pet owners, their 90% coverage through
Trupanion is paid directly to the veterinarian
at the time of invoice, dramatically reducing
out-of-pocket costs. For veterinarians,
Trupanion enables them to move forward with
“Plan A” care for any sick or injured pet while
growing their top and bottom lines. More
Trupanion ExpressTM hospitals lead to happier
veterinarians and happier pet owners.
In total, we spent over (cid:7)17 million developing
this technology, spending (cid:7)7 million on it
in 2015 alone. These costs, net of amounts
capitalized, are re(cid:192)ected in the technology
portion of our (cid:191)xed expenses.
We have now moved into the deployment
phase of Trupanion ExpressTM. Going forward,
we anticipate continued maintenance and
implementation costs, but on a much smaller
scale. (cid:50)ur rollout of the system is ahead of
our original deployment plan. We ended 2015
with Trupanion ExpressTM installed in over
500 veterinary hospitals — 150 more than our
initial projections. In the last six months of
2015, we paid over 25% of veterinary invoice
dollars directly to veterinarians. I am very
proud of this achievement.
I am also very proud of our achievements
related to our Territory Partner training
and support programs in 2015. We are
continually improving in this important part
of the business. We ended the year with 84
Territory Partners, which was one short of
our target for the year. In 2015, our Territory
Partners made over 8(cid:25),000 face-to-face visits
with veterinarians and their staffs in over
19,500 veterinary hospitals throughout North
America. As a result, we increased our active
hospital8 count in 2015 to 7,(cid:25)(cid:25)0 — a 2(cid:25)%
increase from 2014.
2015 SHAREHOLDER LETTER
TRUPANION • 4
As the acceleration of our active hospital base
shows, our Territory Partners are becoming
increasingly effective. This growth is even more
signi(cid:191)cant, considering that the vast majority
of our Territory Partners operate in relatively
“new territories” where they have been building
relationships for fewer than 3 years. A typical
territory or market has approximately 2 million
humans, 1 million cats and dogs, and 250
veterinary hospitals.
In our more established markets (cid:11)over 5
years(cid:12), approximately 50% of hospitals are
active. Considering the quality of our (cid:191)eld
representatives today, I am con(cid:191)dent that our
less established Territory Partners will be
increasingly successful as we continue to give
them resources and support. Here is another
way to think about it — if all of the 19,500
veterinary hospitals that we currently visit
were in more established markets, we would
expect to have close to 10,000 active hospitals.
That is consistent with our current active
hospital growth rate, as shown in Figure 1.
Figure 1.
Opportunities for Improvement
2015 was a good year, but it was far from
perfect. We made some mistakes and in
hindsight, we should have done a few
things differently.
The (cid:191)rst area for improvement is the
onboarding of new colleagues. While we are
excited about the new additions to our team in
2015, we could have done a better job training
them. (cid:50)ur company is unique, and it takes
time to understand what we do. We can serve
our new colleagues better if we spend more
time upfront educating them on our business
as a whole. In 201(cid:25), we will leverage the Tru-
University program that we developed for our
Territory Partners and extend it to our new and
existing team members. I am con(cid:191)dent this
effort will more than pay for itself over time.
The second area of concern is our lack of
execution educating pet owners about the
bene(cid:191)ts of Trupanion(cid:182)s approach and our value
proposition compared to our competition. We
know we have the highest value proposition in
the industry, but I(cid:182)m not sure how effectively
this message is communicated to pet owners
(cid:11)unless perhaps they talk to a veterinarian at
one of our active hospitals(cid:12). I expected greater
progress on this front in 2015, and it will be
an area of increased focus in our 201(cid:25)
marketing efforts.
The third area I would like to focus on
improving this year is related to our LVP:PAC
ratio in each of our pricing sub-categories.
(cid:50)verall we have been close to hitting our
5:1 LVP:PAC target, but within some of our
sub-categories we have not been as accurate
or focused on hitting this target ratio. There
are some categories in which we are simply
mispriced, while in other categories we haven(cid:182)t
been as accurate in managing our acquisition
spend in relation to the lifetime value of those
5 • TRUPANION
2015 SHAREHOLDER LETTER
pets. Said another way, categories with a higher
lifetime value allow for higher acquisition
spend, while categories with a lower lifetime
value should re(cid:192)ect the same discipline. In
201(cid:25) we will spend more energy improving our
accuracy in this area.
The fourth area that could improve is our (cid:191)xed
expenses. I take full responsibility for not being
more aggressive in this area. If a do-over were
possible, we would have targeted a lower spend
in our (cid:191)xed expenses in 2015. (cid:50)ur 201(cid:25) budgets
re(cid:192)ect these learnings.
Growth Strategy
Turning to our strategy, our goal is to deliver
consistent, long-term growth.
The North American market penetration
remains low, so the opportunity for growth is,
and will remain, huge. We have been grabbing
40% of revenue growth in North America and
are poised to maintain category leadership in
the future. (cid:50)ur central team of data experts
drive business decisions by consistently
analyzing our proprietary data and extracting
insights to drive ef(cid:191)ciencies. They optimize
pricing to provide ultimate value to pet owners,
maintaining our commitment to pay out 70%
of the revenue we receive to the average pet
owner within a sub category. Sub category
speci(cid:191)c pricing ensures that all of our members
receive the same value proposition regardless
of whether they pay (cid:7)20 or (cid:7)200 per month.
In the coming year we will focus on adding
more active hospitals and then increasing
same-store sales in those hospitals. In addition,
we will reinvest our efforts to build brand
equity and increase conversion rates and leads,
while remaining disciplined to our LVP:PAC
ratio. This is the same strategy we have
consistently pursued for 8 years in the United
States and for 1(cid:25) years in Canada.
Figure 2 shows our revenue by cohort year,
which illustrates the impact of member
Figure 2.
Figure 3.
Quarterly Premium by Policy Star Year Cohorts
- Total Business (dollars, in millions)
$45.0
$40.0
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$0
Total Revenue by New vs. Existing Pets
- Total Business (dollars, in millions)
$40.2
$35.6
$31.9
$28.1
$24.0
$19.8
$15.9
$13.2
$10.7
$8.8
$6.3
$4.4
$45.0
$40.0
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$0
2 0 1 0 Q 1
2 0 1 0 Q 3
2 0 1 1 Q 1
2 0 1 1 Q 3
2 0 1 2 Q 1
2 0 1 2 Q 3
2 0 1 3 Q 1
2 0 1 3 Q 3
2 0 1 4 Q 1
2 0 1 4 Q 3
2 0 1 5 Q 1
2 0 1 5 Q 3
2 0 1 0 Q 1
2 0 1 0 Q 3
2 0 1 1 Q 1
2 0 1 1 Q 3
2 0 1 2 Q 1
2 0 1 2 Q 3
2 0 1 3 Q 1
2 0 1 3 Q 3
2 0 1 4 Q 1
2 0 1 4 Q 3
2 0 1 5 Q 1
2 0 1 5 Q 3
Other Business
Pre-2010
2010
2011
2012
2013
2014
2015
Existing Pets
New Pets
2015 SHAREHOLDER LETTER
TRUPANION • 6
satisfaction and retention on our revenues year
over year.
By continuing to relentlessly execute on this
strategy, we are con(cid:191)dent that we will have
continued growth for decades. Figure 3 shows
our total revenue growth by new versus
existing pets since 2010.
It(cid:182)s also important for us to know whether
our members are becoming more loyal over
time. Figure 4 shows our retention by cohort
year, which suggests to me that our efforts
to continually increase our value proposition
are working, as our members are becoming
increasingly loyal over time. If this trend
continues and we keep improving in our
execution, it bodes very well for our business.
In particular, our loyal members are prone to
enroll more pets and encourage their friends
and family members to do the same.
The equivalent of obtaining the Holy Grail, or
nirvana, for a monthly recurring subscription
business is to have the existing member
referrals equal or exceed the number of
members who cancel. In Trupanion(cid:182)s case, our
subscription business has averaged a 98.5%
monthly retention rate over the last 5 years.
(cid:50)ver the last 2 years, this monthly average
Figure 4.
Cumulative Retention by Year Signed Up
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Enrolled 12
Mos. Later
Enrolled 24
Mos. Later
Enrolled 36
Mos. Later
Enrolled 48
Mos. Later
Enrolled 60
Mos. Later
2008
2009
2011
2011
2012
2013
2014
has crept as high as 98.7%, leaving us with a
1.3% churn rate each month. If the proverbial
“hole in our boat” is 1.3% of pets cancelling
or passing away each month, it would be
exceptional if 1.3% of our new pets organically
subscribe to our service through existing
members adding a new pet or friend referrals.
The better our value proposition and customer
experience becomes the more we expect to see
our loyalty additions grow. (cid:50)ver the last few
years, we have seen this combination rise to
0.7% of our total subscription pets each month.
We are getting close to the 1.3% “nirvana”
mark, but we still have a 0.(cid:25)% gap versus our
long-term target. However, that is not the
whole story…
Trupanion saw an average revenue per pet (cid:11)our
version of A(cid:53)PU(cid:12) growth in same currency of
(cid:25)% in the US and Canada over the last 5 years.
Assuming (cid:25)% as a proxy for the average annual
increase, the monthly impact is about 0.5%
(cid:11)(cid:25)% (cid:183)12 (cid:32)0.5% (cid:12). This means that on a monthly
basis, I believe we are about 0.1% away from a
state of revenue neutrality, whereby pets who
are added to our book of business (cid:11)with little
to no cost to acquire them(cid:12) combined with
consistently increasing A(cid:53)PU from our new
pets and/or existing pets almost equals the
revenue lost from pets who cancel or pass away.9
When I have mentioned this fact to some
people before, they have responded by asking,
“How is that possible?” Let me explain: (cid:50)ur
pet acquisition cost (cid:11)PAC(cid:12) is our total net
acquisition cost for a period of time divided
by the number of newly enrolled pets. (cid:50)ur
PAC has virtually zero expenses associated
with servicing or maintaining our existing
members. All expenses for servicing our
existing members are intended to be captured
in our variable expenses, which includes our
Territory Partners(cid:182) residual commissions. As a
result, if we wanted to operate the business on
a revenue-neutral basis to gain leverage in our
bottom line, we anticipate that the theoretical
7 • TRUPANION
2015 SHAREHOLDER LETTER
In Conclusion
The team truly rallied in 2015, and we remain
as excited as ever about the future. I(cid:182)ve said in
the past that we are on mile 3 of a marathon,
but after this year, we(cid:182)ve moved to mile 4.
I appreciate that this letter includes more
numbers than you may be accustomed to
seeing, but we strive to (cid:191)nd long-term focused
shareholders who understand our business
on a deeper level. We are con(cid:191)dent that these
shareholders will be aligned with our values
and best positioned to bene(cid:191)t from our
strategy. If you are an investor who is new to
our story, I encourage you to take the time to
learn more about Trupanion and welcome you
to come visit our team in Seattle.
For those current shareholders who have
already dug into our business and placed their
trust in us… thank you.
Darryl Rawlings
Founder & Chief Executive Officer
PAC costs would be the relatively small
expenses associated with conversion costs of
adding the 0.7% new pets per month, offset by
our new member sign-up fees.
If some day our monthly churn equals the
percentage of pets added by existing members
plus member referrals, we could be in a
position to grow our company at virtually
zero cost, if we so choose. More speci(cid:191)cally,
we could cut our PAC costs to include only
conversion costs (cid:11)which would be largely offset
by sign-up fees(cid:12), and our revenue and cash (cid:192)ow
would still grow at the rate of price increases.
As discussed above, annual price increases are
currently (cid:25)%, with no signs of slowing down.
Looking Ahead
As the CE(cid:50) of Trupanion, it is my responsibility
to create wealth for our shareholders while
solving a large problem for our members,
building moats around our business, and
aligning the interests of all of our constituents.
I believe we can best accomplish these goals if
we continue our progress in these four areas:
1. Adding more responsible, loving pet
owners to Trupanion(cid:182)s book of business(cid:30)
2. Building relationships and trust with more
veterinarians and their staff(cid:30)
3. Enhancing the customer experience(cid:30) and
4. (cid:53)educing our (cid:191)xed expenses as a
percentage of our revenue, so that we
can continue to expand our adjusted
operating margin.
As we expand our margins, we must also
diligently grow our pet base. As I said at the
outset, this means focusing on a 5:1 LVP:PAC
ratio. We operated slightly below this level
in 2015, but we believe our long-term target
remains achievable.
2015 SHAREHOLDER LETTER
TRUPANION • 8
1“Fixed expenses” are comprised of our general and administrative expenses and our technology and development
expenses, less depreciation and stock-based compensation expenses.
2Adjusted operating income is our non-GAAP metric of operating pro(cid:191)t before sales and marketing. This previously was
referred to as “discretionary margin.” As a percentage of revenue this is referred to as “adjusted operating margin.”
3In this letter and our other publicly available reporting, we use certain non-GAAP measures. We believe it is important
to view these non-GAAP measures as a complement to our (cid:191)nancial statements(cid:30) however, these measures are not a
substitute for, or superior to, measures of (cid:191)nancial performance prepared in accordance with GAAP, which appear in the
accompanying annual report. These measures also may be different from, and inconsistent with, non-GAAP measures
used by other companies. For reconciliations of these measures to the most comparable measures calculated under GAAP,
please refer to our Investor (cid:53)elations website under the (cid:52)uarterly Earnings tab.
4“Variable expenses” are comprised of our costs of revenue other than claims (cid:11)i.e., member service expenses, renewal
fees to our independent referral network, credit card transaction fees and premium tax expenses(cid:12) less stock-based
compensation expenses.
5Excluding stock based compensation.
(cid:25)Acquisition cost, adjusted operating income, adjusted operating income margin and adjusted EBITDA are non-GAAP
measures that we use to evaluate our performance. Acquisition cost is our sales and marketing expense before stock-
based compensation expense. Adjusted operating income (cid:11)historically referenced as discretionary income(cid:12) measures
our operating loss before acquisition cost, other stock-based compensation expense and depreciation and amortization,
while adjusted operating income margin (cid:11)historically referenced as discretionary margin(cid:12) is adjusted operating income
expressed as a percentage of total revenue. Adjusted EBITDA is net loss excluding stock-based compensation expense,
depreciation and amortization expense, interest income, interest expense, change in fair value of warrant liabilities and
income tax.
7As a reminder, lifetime value of a pet (cid:11)LVP(cid:12) is calculated in part based on gross pro(cid:191)t from our subscription business
segment for the 12 months prior to the period end date excluding stock-based compensation expense related to cost of
revenue from our subscription business segment, sign-up fee revenue and the change in deferred revenue between periods,
multiplied by the implied average subscriber life in months. Implied average subscriber life in months is calculated as the
quotient obtained by dividing one by one minus the average monthly retention rate. We monitor LVP to assess how much
lifetime value we might expect from new pets over their implied average subscriber life in months and to evaluate the
amount of sales and marketing expenses we may want to incur to attract new pet enrollments. Pet acquisition cost (cid:11)PAC(cid:12)
is calculated as net acquisition cost divided by the total number of new pets enrolled in that period. Net acquisition cost, a
non-GAAP (cid:191)nancial measure, is calculated in a reporting period as sales and marketing expenses, excluding stock-based
compensation, offset by sign-up fee revenue and other business segment sales and marketing expenses. We offset sales and
marketing expenses with sign-up fee revenue since it is a one-time charge to new members used to partially offset initial
setup costs, which are included in sales and marketing expenses. We monitor average pet acquisition cost to evaluate the
ef(cid:191)ciency of our sales and marketing programs in acquiring new members and measure effectiveness using the ratio of our
lifetime value of a pet to average pet acquisition cost.
8 (cid:53)ecall that “active hospitals” is the number of hospitals to which we(cid:182)ve attributed a new enrollment within the past 90
days.
9To Show (cid:50)ur Work, this is calculated as follows: 1.3% canceling each month - 0.7% “loyalty additions” - 0.5% monthly
A(cid:53)PU increases (cid:32) 0.1%. Here, A(cid:53)PU refers to our monthly adjusted revenue per pet or “A(cid:53)PP.”
2014
TO OUR SHAREHOLDERS
2014 ended with our 1,000,000th veterinary invoice being paid after a
member’s pet, a mixed breed dog named Marlee, became sick. We
enrolled our first pet in 2000, and a lot has changed since then, yet it is
humbling to recognize that our mission is as applicable today as it was
when I started the company – arguably more. In Marlee’s case, she
required only $13.18 of medication to solve her problem, but over the
years we have seen other members’ pets pass $30,000 and $40,000 in
paid veterinary invoices. No claim is too big or too small for Trupanion!
As this is our (cid:191)rst shareholder letter as a public company, I would
like to take this opportunity to provide a better understanding of
how we at Trupanion operate and think.
By the end of this letter, I hope you will understand that not only do
we care about creating shareholder wealth, but we truly care about
our shareholders as integral team members. (cid:50)ur plan now includes
achieving free cash (cid:192)ow positive by the end of (cid:52)2 201(cid:25). In the next
(cid:191)ve years, we plan to achieve scale, which we de(cid:191)ne as (cid:25)50,000-
750,000 pets. At scale, our target is to have 5% (cid:191)xed expenses and
a 15% discretionary margin from our subscription business (cid:11)before
sales and marketing(cid:12), with our discretionary income funding
all our growth, including our capital requirements. This may be
aggressive, but I commit to updating you on our progress toward
these goals every year. If you are already an investor, I hope you feel
comfortable with your decision. If you are not yet a shareholder, I
hope you consider adding us to your long-term portfolio.
In our view, the role of a publicly-traded company is to create
shareholder wealth by solving a large problem with a unique
and defensible solution while aligning the interests of all of our
constituents. (cid:50)ur constituents include responsible, loving pet
owners(cid:30) veterinarians and their co-workers(cid:30) Trupanion Territory
Partners(cid:30) Trupanion employees(cid:30) and Trupanion shareholders.
1
The problem Trupanion
is solving
Pet owners in North America spent (cid:7)55 billion
caring for the 180 million dogs and cats last
year, and that number is expected to increase
in 2015. (cid:53)esponsible, loving pet owners
understand how to take care of their dogs and
cats. We exercise them, play with them, feed
them high-quality food, and make sure they
receive preventive health care like (cid:192)ea control,
dental cleanings, and annual checkups. They
sleep in our bed and on our couches, we use
them as our screen savers — and we spent (cid:7)500
million dressing them up for Halloween last
year. But, most of all, we love them as they love
us… unconditionally.
Where we as responsible pet owners struggle
is when they become sick or injured. We
know where to go for help - our trusted local
veterinarian. But we stress over budgeting and
planning for the cost of that veterinary care.
“...RESPONSIBLE, LOVING PET OWNERS —
DO NOT WANT A RETURN ON INVESTMENT.
NOBODY IN THEIR RIGHT MIND WANTS THEIR
PET TO BE ‘UNLUCKY’ OR EVEN ‘AVERAGE.’”
Why is this such a challenge? A few reasons:
1. We have no idea if our pet is going to be
“lucky,” “unlucky,” or “average.”
2. Accidents and illnesses do not occur at
convenient or predictable times.
3. The local cost of veterinary care varies by a
wide margin by hospital and an even wider
margin if you include referral, specialty and
24-hour emergency hospitals.
4. The risk pro(cid:191)le of each cat and dog is very
different.
5. Large veterinary invoices now can cost
(cid:7)10,000, (cid:7)20,000, (cid:7)30,000 — up to
(cid:7)40,000(cid:30) therefore scrambling for a credit
card is no longer a viable option.
Trupanion solves these problems by sharing the
risk equally between the “lucky,” “unlucky,” and
“average” dog or cat, taking into account the
local cost of veterinary care, and the risk pro(cid:191)le
of the pet.
These factors allow us to create “price”
categories - over 1.2 million price categories
last year. These categories are designed to let us
share risks equally and fairly among the “lucky,”
“unlucky,” or “average” dog or cat. For example,
one category is “Golden (cid:53)etrievers,” another is
“dog residing in Santa Barbara,” and a third is
“cats enrolling at the age of six.”
2
A
k
c
Very lu
y p e t s s u bsidize unlu
70%
c
k
y
p
e
t
s
50%
100%
*
*Illustrative
Average pet
Defensible solution
We believe that we have a unique long-term defensible solution.
It starts and ends with being the low-cost operator, meaning that
our cost to administer and the cost to acquire new members are
lowest in North America and very dif(cid:191)cult for any existing or new
company to emulate. This does not mean that our product will
be cheapest in the market(cid:30) it means that we have the ability to
consistently use a higher percentage of our members(cid:182) monthly
subscription fees toward paying veterinary invoices (cid:11)see graph B
on next page(cid:12).
To be completely fair and transparent, it is our underlying costs
that are low today. Similar to (cid:50)penTable when they went public,
our costs in an existing, established market are low. In new
We do not try to predict the
future. (cid:50)ur responsibility
is to understand the costs
associated with each category
and its underlying trend, and
then add a 30% margin. This
“cost plus” approach allows us
to pay 70 cents on the dollar to
the “average” pet owner over
the life of their pet (cid:11)see graph
A(cid:12).
It is important to note that our
members - responsible, loving
pet owners - do not want a
return on investment. Nobody
in their right mind wants
their pet to be “unlucky” or
even “average.” (cid:50)ur members
say, “I hope we never need
to use Trupanion, but I feel
better knowing that if we do,
Trupanion will do what they
say.” Stop and think about this
for a minute… maybe three
minutes if you are not a pet
owner.
3
“OUR PROPRIETARY DATABASE HAS BEEN BUILT
OVER 15 YEARS USING OVER 7.5 MILLION PET
MONTHS OF INFORMATION AND INCLUDES
OVER 1 MILLION CLAIMS.”
markets, until we reach scale,
the cost of acquiring new pets
will be higher. Likewise, our
(cid:191)xed expenses, which include
our G(cid:9)A and our technology
investments, will run higher
for the short term as we invest
ahead of scale to be the long-
term category leader.
Trupanion(cid:182)s proprietary
data has given us a unique
advantage in the marketplace.
We have a central team
of analysts of varying
backgrounds (cid:11)actuary, (cid:191)nance,
math, engineering(cid:12) who serve
as the “truth department”
and support all areas of
the business. They provide
transparency into company
data for better decision-
making and use advanced
techniques to extract insights
from this data. (cid:50)ur proprietary
database has been built over
15 years using over 7.5 million
pet months of information
and includes over 1 million
claims. Pricing accurately
allows us to share our high
value proposition with each pet
owner. We are con(cid:191)dent that
we lead the industry with our
data analytics. (cid:46)nowing what
I know today, it would take me
over 13 years to replicate our
15 years of data.
B
~20% in
frictional cost
30%
30%
50%
70%
Strategic
choice to
spend ~20%
more on
claims
Illustrative
Legacy Model
Trupanion Model
Profit before other costs
Frictional Costs
Fully-loaded Claims Expense
(cid:50)ne of the biggest differentiators for Trupanion is our
unique approach to the market through a (cid:191)eld team we call
Territory Partners. We fundamentally believe that support
from veterinarians is critical to driving broader acceptance of
medical insurance for pets in North America. We have built
our success around this belief, making pet owners aware of our
solution by using Territory Partners to educate veterinarians,
and encouraging them to actively recommend Trupanion in
their hospitals. Territory Partners build relationships and trust
with veterinarians as the local face of Trupanion. In 2014, we
estimate that we made over 80,000 face-to-face visits. (cid:50)ver the
last 15 years we(cid:182)ve made hundreds of thousands of visits with
veterinarians.
At the end of 2014, we had 70 people in the (cid:191)eld and we expect
to have 85 by the end of 2015. We ended 2014 with over (cid:25),000
active hospitals, compared to over 5,000 active hospitals at the
4
C
Trupanion’s Territory Partner Model
Trupanion collects additional proprietary
data to further improve our pricing accuracy,
while maintaining a strong relationship with
supportive hospitals. At the end of 2014, we had
approximately 175 of our (cid:25),000 active hospitals
using Trupanion ExpressTM. These hospitals are
among our most active, representing over 20%
of our claims dollars. While still early, following
implementation, we(cid:182)re seeing improved referral
and conversion rates. Longer term, we also
expect this to aid retention rates (cid:11)see graph D
on next page(cid:12).
Data analytics, expansion of our Territory
Partner sales force, and focus on Trupanion
Express(cid:140) are all strategic investments aimed at
scaling our business and driving the penetration
of medical insurance for pets north of the
approximately 1% it is today in the United
States and Canada.
end of 2013. An active hospital is not a hospital
that displays our brochures, but a hospital that
has had a pet enrolled over the previous three
months.
This approach is effective at creating members
and ef(cid:191)cient from a pet acquisition cost
perspective (cid:11)see graph C(cid:12).
In order to maintain these important veterinary
relationships, we are consistently looking for
ways to enhance the Trupanion experience
in the hospital. Trupanion ExpressTM is our
no-cost software solution that revolutionizes
the member experience and removes a major
barrier — the reimbursement model — that has
historically existed between “pet insurance”
providers and veterinarians. For pet owners,
their 90% coverage through Trupanion is
paid directly to the veterinarian at the time of
invoice — dramatically reducing out-of-pocket
costs. For veterinarians, Trupanion coverage
enables them to move forward with “plan A”
care for any sick or injured pet while growing
their top and bottom lines. In the process,
5
Aligning the interests of all of
our constituents
(cid:53)esponsible, loving pet owners want a solution
to their underlying problem of budgeting for
the costs of veterinary care if their pet becomes
sick or injured. They demand coverage for the
medical issues most likely to occur to their pets.
They want to use their veterinarian of choice
and to have 90% of the actual invoice paid
directly to their veterinarian so they do
not have to come out of pocket and suffer
through a cumbersome reimbursement model.
They do not want to be penalized if their pet
becomes “unlucky.” Most importantly, they
want value. Unfortunately, pet owners were not
seeing these things offered in the traditional
products available on the market.
From day one, I have been dedicated to meeting
these needs and today we offer a superior
product that is inherently different than what
D
6
“THE VALUE OF THE TRUPANION SOLUTION COMES IN THE
FORM OF PAYING THE INDUSTRY’S HIGHEST SUSTAINABLE
PERCENTAGE BETWEEN WHAT PET OWNERS PAY IN
THE WAY OF MONTHLY COST AND WHAT WE PAY IN
VETERINARY INVOICES FOR THE ‘AVERAGE PET.’”
pet owners perceive as pet insurance in North America. In fact,
we do not describe ourselves as “pet insurance” — we are medical
insurance for cats and dogs. Why is that? Each pet owner you
meet will have a different perception of what “pet insurance” is
— wellness-only coverage, accident-only coverage, an HM(cid:50)-like
product that restricts where you can get care, fee schedules that
restrict how much care you can receive, and unequivocally all
reimbursement-based.
We clearly solve all of these problems — and more. We cover
hereditary and congenital conditions (cid:11)those things most likely to
happen to a pet(cid:12), we don(cid:182)t raise rates because a pet has claims, we
have no payout limits, and we(cid:182)re eliminating the reimbursement
model with Trupanion Express(cid:140). The value of the Trupanion
solution comes in the form of paying the industry(cid:182)s highest
sustainable percentage between what pet owners pay in the
way of monthly cost and what we pay in veterinary invoices
E
Value Per Category*
$30.99 (70%)
$23.49 (70%)
$40.47 (70%)
Lucky
Pets
Unlucky
Pets
(50%)
(100%)
Average pet (ARPP)
$44.27
Average cat
$33.56**
Average dog
$57.82**
$62.34 (70%)
$60.99 (70%)
$101.17 (70%)
for the “average pet.” This
is a strong value not only
for the pet owner — but for
the veterinarian and the pet
as well. We(cid:182)re aligning the
interests of the pet owner and
the veterinarian, allowing both
parties to focus on providing
the best care, rather than the
cost.
I would like to draw a
comparison between
Trupanion and another
subscription membership
company that I greatly admire.
Costco members inherently
understand if they are
purchasing a (cid:25)0” (cid:192)at screen,
a bottle of Bordeaux, a can of
tuna, or a roll of toilet paper,
that they are always getting the
best deal. Trupanion members
need to know that whether
they are paying (cid:7)33/month for
their cat or (cid:7)144/month for
their Bulldog, they are getting
the industry(cid:182)s best deal, for a
product that works, and from
a company they can trust (cid:11)see
graph E(cid:12).
Average Bulldog
$89.06**
Bulldog in Jacksonville
$87.13 (zip: 32202)**
Bulldog in NYC
$144.53 (zip: 10018)**
*Illustrative.
**Assumes 2-year old pet selecting a $100 deductible
7
Let’s have a discussion
about veterinarians, the cost
of veterinary care and our
philosophy around these items
Trupanion has been built from the ground-up
based on our relationships with veterinarians
and their staff. They are extremely loyal
and consistent once we earn their trust.
Veterinarians and their staff chose their
occupation because they love pets. Getting into
veterinary school can be more dif(cid:191)cult than
getting into medical school or dental school. (cid:60)et
veterinarians earn considerably less than their
counterparts on the human side.
The delivery of veterinary medicine is thriving.
There are 28,000 veterinary hospitals across
North America and approximately 2(cid:25),000
are independently owned. They are extremely
ef(cid:191)cient, providing the same surgeries,
medicine, diagnostics, and hospitalization
as their human counterparts at a fraction
of the cost. The costs of veterinary care are
market-driven due to such a high percentage of
independent hospitals serving the needs of their
local pet owners in a way that sets their hospital
apart from the competition down the street
or around the corner. Veterinarians are also
highly respected within their community, often
rated among the highest professions alongside
medical doctors and pharmacists.
Understanding the motivations, values and
perspectives of veterinarians and their staff
is critical to our long-term success. They do
not want their industry screwed up like the
human side. This means no to any HM(cid:50)-like
models. Having insurance companies drive
the pricing of care or selection of hospital
is not acceptable. They want to serve their
clients(cid:182) needs, not waste their time on (cid:191)lling
out forms. They know the difference between
a high-quality product and one that has
limitations and exclusions. They understand
what appropriate care is and are passionate
about providing it. Compassionate euthanasia
is a part of veterinary medicine, and will always
be a part of veterinary medicine(cid:30) but economic
euthanasia is heartbreaking to all veterinarians
and their staff. Finally, they agree that medical
insurance for cats and dogs is for catastrophic
issues, not wellness or routine care.
Trupanion(cid:182)s product pays 90% of the
veterinarian(cid:182)s actual invoice for all diagnostics,
surgeries, medications, and hospital care.
We have no payout limits - period. We do not
penalize pet owners if their pet becomes sick
or is injured. We cover all medical conditions
that arise after a pet owner gets Trupanion(cid:30) this
includes the things most likely to occur to their
pet(cid:182)s breed, known as congenital or hereditary
conditions. Trupanion has only one simple plan,
so it is easy for veterinarians and their staff
to understand and therefore explain to their
clients. Trupanion has the ability to integrate
with the veterinarian(cid:182)s practice management
8
“WE ARE NOT TRYING TO CONTROL THE
COST OF VETERINARY CARE; WE ARE SIMPLY
TRYING TO UNDERSTAND THE COSTS FOR THE
AVERAGE PET IN EACH CATEGORY, AND ADD
A 30% MARGIN.”
software, so we replace cumbersome paperwork
with a couple of clicks and the ability to pay the
veterinarian directly.
We are not trying to control the cost of
veterinary care(cid:30) we are simply trying to
understand the costs for the average pet in each
category, and add a 30% margin. This makes the
budgeting manageable to the responsible, loving
pet owner.
Why our values are so
important
Trupanion employees love pets. (cid:50)n an average
day in our Seattle of(cid:191)ce we will have about 400
employees working alongside 200(cid:14) dogs and
cats. This is an important part of our culture,
as our four-legged friends constantly remind
us why we come to work. To ensure the comfort
of all the pets, we have full-time dog walkers.
(cid:50)ur average employee has years of experience
in veterinary hospitals, shelters, doggy day
cares or other related (cid:191)elds. Similar to the
demographics of a veterinary hospital, we have
a high percentage of female employees between
the ages of 24 and 40. In January, to supplement
our dog walking services, we launched a child
care center for our employees with two-legged
children under the age of three.
Another Seattle company that we admire is
Starbucks and in particular their values on
“social conscience.” We at Trupanion believe
that our environment and values are critical
to our long-term success. We feel strongly that
everyone at Trupanion is equally important(cid:30)
we all have the same size desk and the same
bene(cid:191)ts regardless of whether we are hourly or
salaried or our tenure with the company. We
want everyone to be ful(cid:191)lled and comfortable
being themselves. We have a sign on our wall
that shows the (cid:50)scar Wilde quote, “Be yourself,
everyone else is taken” and we take that motto
seriously.
(cid:50)ur values are not something we put on
marketing materials - they are beliefs or traits
that are shared by our community and de(cid:191)ne
our culture. We believe that the values of a
company are similar to the characteristics of an
individual. If you were to describe a friend to a
co-worker you may use words like smart, funny,
loyal, and crazy. The combination of these
words would paint a picture to your co-worker
about your friend. If a pet owner or veterinarian
describes Trupanion in a way that lines up with
our values, then we have the underpinning of a
Brand. (cid:50)ur values are:
• We do what we say
•
Simple is better
• We do not punish unlucky pets
• We(cid:182)re innovative and fair
• We love pets(cid:4)
(cid:50)ur values are listed in the order of priority —
if someone loves pets, but they do not do what
they say? That individual does not belong at
Trupanion.
9
Shareholders have been with us since the beginning
I started Trupanion 15 years ago in Vancouver, BC. From the beginning, I have had shareholders.
For the (cid:191)rst few years the company was bootstrapped with my personal proceeds earned from
the sale of my cigar business, and from the trust of eight individuals who invested (cid:7)25,000 each.
Several years later, and before taking on any institutional investors, we agreed to pay (cid:7)35,000 to
each of the eight individuals and they kept 100% of their shares. It was very important then, as it is
today, to repay shareholders and to do what we say.
(cid:50)ur commitment to our institutional investors was to take our learnings from our (cid:191)rst seven years
in Canada and to create and build a category for medical insurance for cats and dogs in the United
States (cid:9) Canada. In 2008, we said that we would build relationships with veterinarians, get the
underpinnings of a consumer brand, expand upon our data, focus on the consumer experience, and
take the company public in 2014.
(cid:50)n July 18, 2014 we took Trupanion (cid:11)T(cid:53)UP(cid:12) public on the New (cid:60)ork Stock Exchange and embarked
life as a public company.
2014 performance
First, an overview. While becoming a public
company was a major milestone, it was truly
only one moment in time for us. We had a
full year of hard work, accomplishments, and
setbacks. I believe we did several things well
and several things poorly in 2014, and I(cid:182)ll
outline them here.
In the negative column, we disappointed
ourselves and others by having a pricing miss
in (cid:52)3 (cid:9) (cid:52)4, which was outside of our allowable
tolerance and affected our gross margin. For
this miss I blame myself. For several years we
had been extremely accurate at our pricing,
so much so that I became overly con(cid:191)dent
and focused on weaker areas of our business.
Primarily, I focused on improving the quality,
selection and training of our national sales
force of Territory Partners (cid:11)an area we began to
fumble in 2012 and 2013(cid:12), as well as preparing
to take the company public. What I didn(cid:182)t
account for during this time was the speed
in which the company was able to execute
change in processes. I had a (cid:192)at organizational
structure and unfortunately I was a critical
component in disseminating information
across departments. Said another way, the
impact of the way we were changing our claims
process was not clearly understood in our
pricing department and we got surprised. The
organizational structure was adjusted in the
fourth quarter of 2014 and we now have (cid:191)ve
clear owners of every key metric and line item
10
on our pro(cid:191)t and loss and cash (cid:192)ow statements.
These owners meet weekly and I am no longer a
barrier to the dissemination of information.
The second area where we let ourselves down
was holding on to some people longer than
we should have, speci(cid:191)cally some Territory
Partners who we had previously on-boarded too
quickly and, to be fair to them, without enough
training and tools to increase their odds of
being successful. When talking about having
the right people in the right seat on the bus, my
experience tells me this will not be the last time
we acknowledge this failure.
A third area that disappointed me was our focus
on increasing enrollments and same-store sales
ahead of a more foundational goal of increasing
enrollments by adding more active hospitals. It
would be lovely to do both well, but we mixed up
the priorities last year.
In the positive column, we believe we raised
more than enough money to carry us through to
cash (cid:192)ow positive. We have no intention of going
back to the markets to raise additional capital.
To set appropriate expectations clearly, I
should caveat that if we miraculously discover
a new lever that will dramatically and cost-
effectively change our growth projection curve,
and it requires additional capital, we will do
what(cid:182)s best for the company and shareholders
long-term. I put this miraculous new lever
probability somewhere between very low
and extremely low. After 15 years, we are not
expecting to (cid:191)nd a silver bullet.
Second, we have improved the hiring, training
and selection of our Territory Partners. In 2014,
we launched a program we call “Trupanion
University” where current and prospective
Territory Partners participate in an extensive
three-week training on Trupanion.
Third, we have signi(cid:191)cantly advanced our
knowledge, product and processes to allow us
to improve our member experience, facilitating
our long-term goal of paying veterinarians
directly and eliminating the cumbersome
reimbursement model. Trupanion Express(cid:140) is
very important to our long-term ambitions and
in 2015 we intend to learn much more to ensure
we get the full impact when we are eventually
deployed throughout North America.
Let’s move on to the numbers
We are not at the stage where I can start talking
about earnings per share. What I can go over is
the top line, bottom line, and some of our key
metrics. But (cid:191)rst, it(cid:182)s important to understand
how we think about our business metrics
internally. We use the old-fashioned cash (cid:192)ow
method.
We collect cash at the beginning of the month,
and then pay veterinary invoices, variable
expenses to support member service, taxes
and fees, and (cid:191)xed expenses in the way of
technology and general and administrative
expense (cid:11)G(cid:9)A(cid:12). The remaining cash, before
sales and marketing, is what we term our
“discretionary income.” We can choose to
11
spend this discretionary income to acquire
new members, invest in foundational one-time
initiatives, re-purchase shares, or one day,
distribute to our shareholders.
•
•
•
PAC was (cid:7)119 (cid:11)pet acquisition cost(cid:12)
LVP was (cid:7)590 (cid:11)lifetime value of a pet(cid:12)
LVP/PAC was 5.0(cid:59)
Please note our discretionary income is not
recognized by GAAP accounting or the SEC, but
we certainly are not the (cid:191)rst direct-to-consumer
subscription company that thinks about their
business this way. John Malone and TCI (cid:11)the
cable company(cid:12) in the late seventies introduced
the investment community to the term EBITDA
when they needed to describe cash (cid:192)ow in their
business in lieu of earnings per share. TCI
shareholders were well rewarded when they
educated themselves in how they managed their
business based on cash.
It should also be noted that the discrepancy
between our actual cash (cid:192)ow and GAAP
accounting for revenue is approximately 200
basis points in the positive direction. The two-
point swing is related to the requirement to
defer approximately half of a month(cid:182)s revenue
forward one month as our members pay on
differing days during the month and receive a
month of coverage.
Back to the GAAP accounting and other key
metrics in 2014:
• (cid:53)evenue was (cid:7)11(cid:25)M
• AEBIDTA was a loss of (cid:11)-(cid:7)10M(cid:12)
•
Free cash (cid:192)ow was (cid:11)-(cid:7)1(cid:25)M(cid:12)
• Adjusted (cid:53)evenue Per Pet (cid:11)our version
of A(cid:53)PU(cid:12) was (cid:7)44 per month
• Discretionary income was (cid:7)3M
All the above key metrics, excluding (cid:192)uctuations
in foreign exchange rates, were at or slightly
ahead of analyst consensus.
Notable milestones in 2014
•
2014 showed continued revenue and
pet growth (cid:11)see graph F on page 14(cid:12).
• We added 213 people to our home
of(cid:191)ce team — that is 44% growth over
2013. We also welcomed (cid:25)7 new pets
to the of(cid:191)ce, making our Trupanion
family now a total of 227 pets and 413
employees— a 1:2 pet to human ratio.
• We launched the US Veterans Service
Dog Program, working with the US
Department of Veterans Affairs.
Through this program, approved
veterans(cid:182) service dogs receive quality
veterinary care and Trupanion covers
100% of all coverable expenses — this
includes treatment for pre-existing
conditions and wellness and preventive
exams, as well as everything covered
for Trupanion(cid:182)s members. This
program shows up in our “(cid:50)ther
Business” section of our P(cid:9)L.
12
• (cid:50)ur Member Care team initiated a new
• We hosted a three-day conference in
partnership with Aspect, a workforce
management solution, to help deliver
exceptional service. Aspect allows
Trupanion members to move from
channel to channel and connect to the
same team member. Almost overnight,
Trupanion shaved 30 seconds off
average wait times by leveraging
skills-based routing. Aspect technology
has also helped Trupanion improve
timeliness of email responses and stay
within service level goals.
• We made our stock market debut on
the New (cid:60)ork Stock Exchange. Several
team members traveled to New (cid:60)ork
City to ring the closing bell. The
traditional celebratory dinner was held
picnic-style in Central Park while we
dined on Shake Shack burgers. The
rest of the of(cid:191)ce partied at home with
champagne and cupcakes. (cid:50)ur stock
opened at (cid:7)10 per share, and we raised
(cid:7)82 million.
• We launched our new website — a
robust, fully responsive, world-class
web platform and what we believe
is the best possible (cid:181)front door(cid:182) for
Trupanion. After its launch, The
Interactive Media Council named
Trupanion.com the winner of the 2014
Interactive Media Award for Best in
Class Website.
downtown Seattle for our Territory
Partner sales force. The conference
featured keynote speakers (cid:53)ichard
Galanti, Costco CF(cid:50)(cid:30) Howard Schultz,
Starbucks CE(cid:50)(cid:30) David Loewe, Seattle
Humane Society CE(cid:50)(cid:30) and (cid:46)ristin
Hamilton, (cid:46)oru CE(cid:50).
• (cid:50)ur Chief Technology (cid:50)f(cid:191)cer, Craig
Susen, was awarded the CT(cid:50) of the
(cid:60)ear Innovator Award.
•
Through our Member Donation
Program, our members donated over
(cid:7)104,000 to charities across the United
States and Canada. These charities
include The American Humane
Association, National Canine Cancer
Foundation, The Farley Foundation,
and the BC SPCA Biscuit Fund. We
also donated 9,107 pounds of pet food
to the Seattle Humane Society in our
annual pet food drive and sponsored 19
children in need for the holidays.
• (cid:50)ur Child Care Center hosted its
open house. The center is available
to Trupanion employees at no cost,
and serves children aged (cid:25) weeks to
2.5 years. The Child Care Center was
of(cid:191)cially opened January 5.
• We ended the year with 232,000
enrolled pets, 70 regional sales people
in the (cid:191)eld and (cid:25),073 active hospitals.
13
F
Total Revenue by New vs. Existing Pets*
Existing Pets/Revenue
New Pets/Revenue
232,000
pets
(cid:13)All revenue amounts re(cid:192)ect adjusted revenue, in millions. For a description of how we calculate adjusted revenue, see “Management(cid:182)s Discussion
and Analysis of Financial Conditions and (cid:53)esults of (cid:50)perations — Non-GAAP Financial Measures.” Existing Pets/(cid:53)evenue re(cid:192)ects adjusted revenue
from subscription pets who had active subscriptions at the beginning of the quarter and recurring adjusted revenue from our other business segment.
New pets/revenue re(cid:192)ects adjusted revenue from subscription pets enrolling during the quarter and adjusted revenue added during the quarter from
our other business segment.
Our business model
(cid:50)ur business model is simple. But the execution
of our business model is challenging. It requires
focus, years of data, and a great team.
(cid:50)ur business model is similar to the cable
industry in the 19(cid:25)0(cid:182)s, the cellular industry in
the 1980(cid:182)s, and more recently, two companies
we admire - Net(cid:192)ix and Pandora. Purely, we
are a direct-to-consumer monthly subscription
service.
Subscription service companies rely on a high
value proposition for their members, something
they feel and value. The best subscription
companies have a high cost of goods, an
exceptional member experience, and the lowest
frictional costs.
The model is to spend (cid:59) to acquire a new
member and to have the discretionary income
return substantially more than (cid:59) over the life
of the subscription. Margin percentages are
less important than the amount of free cash
generated over the life of the subscription. (cid:50)ne
14
“OUR BUSINESS MODEL IS SIMPLE. BUT THE
EXECUTION OF OUR BUSINESS MODEL IS
CHALLENGING.”
of our key metrics is our PAC/LVP ratio, which
all quality subscription companies understand.
Internally, we think the PAC/LVP ratio is a little
overstated as it uses the average contribution
dollar and omits the cost of our (cid:191)xed overhead.
It is useful to show the potential before we are
fully at scale and that is why we report it, BUT
it is (cid:192)awed because it does not account for the
cash required to operate our (cid:191)xed expenses.
For these reasons, we are most concerned
with the internal rate of return (cid:11)I(cid:53)(cid:53)(cid:12) for
incrementally adding an average pet. We
calculate the I(cid:53)(cid:53) by understanding our cost to
acquire an average new pet and the free cash
(cid:192)ows that we anticipate will be generated over
the average pet(cid:182)s life. We have previously stated
that, at operational scale (cid:11)(cid:25)50,000 to 750,000
pets(cid:12), our target (cid:191)xed expenses should equal
5%-(cid:25)% of revenues. If we are able to achieve
a consistent 70% gross margin, 10% variable
expenses and 5%-(cid:25)% for (cid:191)xed expenses, our
discretionary margin would be 14%-15%. In the
next few years and before hitting scale if we
can achieve 7%-8%, our I(cid:53)(cid:53) should be in the
neighborhood of 40%-50% (cid:11)see graph G(cid:12).
Unfortunately, we do not have a 40%-50% I(cid:53)(cid:53)
for the average incremental pet today. Candidly,
we have taken a temporary step backward in the
last two quarters with our inadequate pricing
and our currently outsized (cid:191)xed expenses. That
being said, we believe that these results are
achievable based on our performance in more
mature markets. Lots of execution ahead(cid:4)
Please remember we have over 1.2 million
price categories where we monitor our PAC/
LVP and therefore our I(cid:53)(cid:53) by category. They
will not have the same results. As we try to
accelerate some channels and categories, some
will scale well for a long time, others will have
diminishing returns. It is our responsibility
to understand when to put our foot on the
accelerator, when to coast, and when to slam on
the brakes.
G
Months
68
Next few years
Churn
1.47%
year
LVP
570
Months
LVP/PAC 5X
DM
ARPU
8.1%
$50.11
DM
PAC
FCF
0
6
1
12
2
12
3
12
4
12
5
12
6
2
$24.35 $48.71 $48.71 $48.71 $48.71 $48.71 $8.12
-$114
68
IRR
-$89.65 $48.71 $48.71 $48.71 $48.71 $48.71 $8.12 47%
LVP = Lifetime Value of a Pet
DM = Discretionary Margin
PAC = Pet Acquisition Cost
ARPU = Average Revenue Per Pet (Unit)
15
Market comparables
Methods of valuation
Prior to and since going public we have been
asked a set of questions, all with a similar
theme: Why are you being covered by internet
analysts? Why are you being covered by animal
health analysts? Are you not just an insurance
company? What are the market comparables to
Trupanion?
The answer to all of these questions is that we
are not easily put into a box. (cid:50)ur product is a
catastrophic health insurance product. For this,
we internally believe our challenges are not
similar to a typical health insurance company
and the complexity of offering our product is
just another barrier to entry. We live in the
animal health world, this is where 70% of the
team comes from and it is necessary that we
understand the needs of veterinarians and
pet owners, but we are not a pharmaceutical,
laboratory or distribution company. We also are
not a SAAS company with a high gross margin.
We are a monthly recurring revenue business
that requires us to be a low-cost operator,
with a high value proposition, and a focus on
delivering a positive member experience with a
low acquisition cost.
I have mentioned several companies in this
letter that I admire, but I don(cid:182)t mention them
to drive valuation comparisons. They inspire
me, and as a business, we aspire to some parts
of their business model but I am not trying to
suggest they are market comparables.
(cid:50)ur business model is a direct-to-consumer
monthly subscription service and this is how we
manage the business.
It would be disingenuous for us to talk about
comparables without talking about valuation
methods. My opinion on these topics probably
isn(cid:182)t relevant to the marketplace, but I(cid:182)m going
to give it anyway:
• Multiple of earnings is not very
relevant when a company is losing
money. If investors are currently
expecting/requiring dividends, we are
not the right investment right now.
However, as I mentioned earlier, we
expect to achieve cash (cid:192)ow positive in
the next 12 months and achieve scale
in the next (cid:191)ve years.
• Multiple of EBITDA is applicable
for many growth companies if the
capitalized portion of the P(cid:9)L
is similar to other comparable
investments. We do not capitalize our
growth(cid:30) in fact, we capitalize only
a small portion of our technology
spend today and we expect this will
be reducing as we scale our (cid:191)xed
expenses, G(cid:9)A and technology to 5%-
(cid:25)% of revenues.
• EBITDA and GAAP puzzle me at times.
If we purchased a book of business
from a competitor, the purchase would
be capitalized. For example, if we
purchased a competitor with 50,000
pets at a price of (cid:7)300 per pet, the
purchase price would be (cid:7)15 million.
With GAAP accounting, the purchase
would have little effect on our EBITDA
and income in the year we purchased
16
Deployment of your capital
short-term
(cid:50)ver the next few years we will be deploying
your capital in our foundation, member
experience, growth and scale. Speci(cid:191)cally, we
intend to invest in:
• (cid:50)ur Territory Partner program to
increase the number of active hospitals
recommending Trupanion. We have
a long way to go to earn the trust
of the 28,000 veterinary hospitals
throughout North America.
• Building and deploying technologies
that will improve our member
experience and lower our operating
costs.
• Data to improve our ability to price
accurately and fairly among all of our
categories. This is at the core of what
sets us apart. (cid:50)ur members need to
know that they are always getting the
best deal.
• Cost-effectively adding more pets.
the business, and the following year,
the casual observer would only see our
increased revenue from the additional
50,000 pets and the corresponding
pro(cid:191)ts. Hold with me… this is where it
gets interesting. If in the same year, we
chose not to purchase the competitor(cid:182)s
pets for (cid:7)300 per pet, but instead
grew organically by 50,000 pets at
(cid:7)150 per pet, our EBIDTA or income
would have a -(cid:7)7.5M hit. EBIDTA is
supposed to be a proxy on cash and
GAAP accounting… well-intended as
it is, it does not always lead us to the
best investment decisions. The cash
decision is obvious, it is better to grow
organically at (cid:7)150 a pet vs. paying
(cid:7)300 per pet. Needless to say, we like
to manage our business based on cash.
• We are cash-in/cash-out every
month. We are not a company that
makes money on the (cid:192)oat. There are
insurance companies that do that very
well if you are looking for a return
on equity type of investment in your
portfolio.
• Discounted cash (cid:192)ow is how we
internally view our long-term strategic
choices. It is purely mathematical and
although the inputs of terminal growth
rates and weighted average cost of
capital can move the valuation all over
the chart, if you keep them constant,
you can determine if your choices move
the needle in the right direction.
17
“WITH THE NORTH AMERICAN MARKET
PENETRATION AT APPROXIMATELY 1%, WHILE
WESTERN EUROPE RANGES BETWEEN 5% AND
25%, WE HAVE DECADES OF RUNWAY AHEAD.”
Deployment of your capital
long-term
Low has set the tone, leading by example with
incredible character, self-awareness and drive to
help build something great.
As mentioned previously, we use our I(cid:53)(cid:53) to
determine if adding an incremental pet is the
best use of our shareholders(cid:182) money. With
the North American market penetration at
approximately 1%, while Western Europe
ranges between 5% and 25%, we have decades
of runway ahead. (cid:53)emember, at our average
revenue per pet, every 1% of penetration equals
about (cid:7)1 billion in revenue. If at scale we
cannot get a consistent return healthier than
the average shareholder, we could return the
cash in the way of dividends. If we have extra
capital and our share value is signi(cid:191)cantly
below our discounted cash (cid:192)ow value, we could
re-purchase shares. These are theoretical
scenarios(cid:30) however, I expect we will continue
to see growth opportunities for years to come
and continue to re-invest to capture more of the
available market.
The team
Every CE(cid:50) says they have a great team. Instead
of me saying it to you, I invite you to visit our
Seattle of(cid:191)ce so you can meet them yourself,
experience our environment, and hang out with
our 200(cid:14) dogs and a few fearless cats.
It(cid:182)s also important to me to call out Dan
Levitan. Dan is the co-founder of Maveron, the
preeminent consumer-focused venture capital
(cid:191)rm. Partnering with Dan and Maveron has
proven to be one of the best decisions that I
have ever made.
I would like to take this opportunity to say
thank you to:
•
The amazing companies that I named
in this letter: Costco, Net(cid:192)ix, Pandora,
(cid:50)penTable, TCI, and Starbucks - thank
you for being an inspiration.
• Veterinarians and your staff: thank
you for believing and trusting that we
could be different.
• (cid:50)ur employees who live and breathe
our values, passionately serve our
members, and have the con(cid:191)dence to
be themselves at work.
• (cid:50)ur Territory Partners who day
after day walk through the doors of
veterinary hospitals, trying to earn
their trust.
• Existing shareholders: we thank you
for entrusting us with your investment.
(cid:50)ur progress to date would not have been
possible without the support and cooperation
from our Board. For years, Chairman Murray
•
To those responsible, loving pet owners
that have Trupanion: thank you for
taking care of your buddy and choosing
us. We hope you are lucky enough to
never need to call us, but if you do, we
will be there for you.
18
For those truly long-term investors who have not purchased T(cid:53)UP, I encourage you
to educate yourself on our company and visit our team in Seattle.
I will leave you with an excerpt of a letter a fellow board member gave to me
recently:
“I have always been attracted to the low cost operator in any
business and when you can find a combination of (1) an extremely
large business, (2) a more or less homogeneous product, and (3) a
very large gap in operating costs between the low cost operator and
all of the other companies in the industry, you have a really attractive
investment situation. That situation prevailed twenty five years ago
when I first became interested in the company, and it still prevails.”
Letter to Mr. George D. Young
From Warren Buffett
July 22nd, 1976
Thank you,
(cid:39)(cid:68)(cid:85)(cid:85)(cid:92)(cid:79)(cid:3)(cid:53)(cid:68)(cid:90)(cid:79)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3)(cid:41)(cid:82)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:9)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:3)
19
2015 FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-36537
TRUPANION, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
83-0480694
(I.R.S. Employer Identification Number)
907 NW Ballard Way
Seattle, Washington 98107
(855) 268 - 9606
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.00001 par value per share
Name of Exchange on Which Registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if smaller reporting company)
Smaller reporting company
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2015, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $144,293,788 using the closing price on that day of $8.24.
As of February 10, 2016, there were approximately 28,398,480 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the definitive proxy statement to be filed by
the registrant in connection with the 2016 Annual Meeting of Stockholders (Proxy Statement). The Proxy Statement will be filed by the registrant with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2015.
TRUPANION, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2015
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant's Common Equity, Related Stock Holder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Signatures
Exhibit Index
Parent Company Financials
Page
3
11
36
36
36
36
37
39
42
65
66
92
92
92
93
93
93
93
93
94
95
97
100
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Note About Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and section 27A of the Securities Act of 1933, as amended (Securities Act). All statements
contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our
future results of operations and financial position, our business strategy and plans and our objectives for future operations, are
forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “target,” “continue,” “anticipate,”
“intend,” “could,” “would,” “project,” “plan” and “expect,” and similar expressions that convey uncertainty of future events or
outcomes, are intended to identify forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in
Part I. Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive
and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all
risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of
these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on
Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the
forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity,
performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake
no obligation to update publicly any forward-looking statements for any reason, except as required by law.
Unless otherwise stated or the context otherwise indicates, references to “Trupanion,” “we,” “us,” “our” and similar references
refer to Trupanion, Inc. and its subsidiaries taken as a whole.
2
PART I
Item 1. Business
Our Mission
Our mission is to help the pets we all love receive the best veterinary care.
Our Company and Approach
We provide a medical insurance plan for cats and dogs throughout the United States, Canada and Puerto Rico. Our data-driven,
vertically-integrated approach enables us to provide pet owners with what we believe is the highest value medical plan for their
pets, priced specifically for each pet’s unique characteristics. Our growing and loyal member base provides us with highly
predictable and recurring revenue. We operate our business similar to other subscription-based businesses, with a focus on
maximizing the lifetime value of each pet while sustaining a favorable ratio of lifetime value relative to acquisition cost.
Our target market is large and underpenetrated. We have pioneered a unique solution that sits at the center of the pet medical
ecosystem, meeting the needs of pets, pet owners and veterinarians, and we believe we are uniquely positioned to continue to
drive market penetration. Our aggregate enrolled pets, including pets in our other business segment, was 291,818 as of
December 31, 2015. Additionally, the total number of pets enrolled in our subscription medical plan has increased every quarter
for the last eleven years. More recently, the total pets enrolled in our subscription medical plan grew from 31,207 pets on
January 1, 2010 to 272,636 pets on December 31, 2015, which represents a compound annual growth rate of 54%.
Total Subscription Pets Enrolled
(in thousands)
Pet owners are often surprised by the cost of veterinary care and can be financially unprepared if their beloved pets become
injured or ill. The costs of medical treatments for pets have become more onerous over time due to the availability and usage of
increasingly advanced veterinary care. Consequently, pet owners without medical coverage may be forced to accept sub-
standard care for their pets due to financial constraints.
To address these challenges, we offer a simple, fair and comprehensive medical plan that pays 90% of actual veterinary costs
for accident and illness claims, has no payout limitations, has few exclusions and can be used to cover the costs incurred at any
veterinary practice, emergency care center or specialty hospital in the United States, Canada and Puerto Rico. This approach
aligns the interests of pet owners and veterinarians, which allows them to focus on providing the best care for pets rather than
minimizing the cost of treatment. Some of our key differentiators include:
•
Superior Value Proposition. Our vertically integrated infrastructure eliminates significant frictional costs that
constrain most of our competitors, which allows us to provide superior value to our members.
• Proprietary Database and Technology Platform. Our custom-built technology platform and proprietary database
contain 16 years of pet health records and give us unique insights into how to both manage our business and accurately
price subscriptions to our medical plan.
3
•
Strong Relationship with Veterinary Community. We have invested significant time and energy communicating our
value proposition to thousands of veterinarians. We engage a national referral network of independent contractors, who
are paid fees based on activity in their regions; we refer to these contractors and their associates, collectively, as our
Territory Partners. Our Territory Partners communicate the benefits of our medical plan to veterinarians through in-
person visits.
• Trupanion ExpressTM. Our software solution Trupanion ExpressTM increases our ability to pay veterinarian invoices
directly, often in less than five minutes. Trupanion ExpressTM integrates with veterinarians’ practice management
software, giving us access to more data, reducing our claims handling expense and giving us the ability to deliver a
significantly better experience to our members compared to the traditional reimbursement model.
We believe that these differentiators serve as competitive advantages, making our business model difficult to replicate.
We generate revenue primarily from subscription fees for our medical plan. Our medical plan automatically renews on a
monthly basis, and members pay the subscription fee at the beginning of each subscription period. Since 2010, at least 88% of
our subscription business revenue every quarter has come from existing members who had active subscriptions at the beginning
of the quarter. Due to our focus on providing a superior value proposition and member experience, our members are very loyal,
as evidenced by our 98.6% average monthly retention rate in 2015. For more information regarding average monthly retention,
including an explanation of how we calculate this metric, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Key Financial and Operating Metrics.”
We enrolled our first pet in Canada in 2000 and our first pet in the United States in 2008. Our revenue for the year ended
December 31, 2015 was $147.0 million, representing a compound annual growth rate of 50% from our revenue of $19.1
million for the year ended December 31, 2010. We have made and expect to continue to make substantial investments in
member acquisition and in expanding our operations to support our expected growth. For the year ended December 31, 2015,
we had a net loss of $17.2 million and our accumulated deficit was $74.4 million at December 31, 2015.
Our Solution
Benefits to Pet Owners
Predictability of costs and peace of mind. Our members can be confident that their pets will be covered in the event of an injury
or illness. We pay 90% of the veterinary costs actually charged by the member’s chosen veterinarian for all covered claims, less
a member’s chosen deductible, if any. Our members may obtain treatment from any licensed veterinarian that they select within
the United States, Canada or Puerto Rico. Our coverage has no payout limits, is not subject to a lifetime maximum payout, and
is not limited by the amount that a veterinarian charges or the treatment that a veterinarian recommends. Our coverage is
designed to be comprehensive and provide members with the highest value, not simply the lowest price. Generally, the only
costs not covered by our plan are those relating to conditions existing prior to the pet’s enrollment, routine or preventative care,
including examination fees and taxes.
Exceptional member experience. We are highly focused on providing an exceptional member experience. We offer a simple and
easy to understand medical plan. We have designed our claims process to be fair, efficient and transparent. We strive to pay vet
invoices directly, often in under five minutes.
Benefits to Veterinarians
Freedom to be the most effective advocate for pets. Our medical plan does not limit how much can be paid for an injury or
illness. This provides veterinarians with the freedom to practice veterinary medicine at the highest level and be the most
effective advocate for the health of the pets.
More loyal client base. Our members visit veterinarians more frequently, which can generate significantly more annual revenue
for veterinarians. Furthermore, pet owners with medical coverage typically spend significantly more on their seriously injured
or ill pet. The result is a client base that is more engaged, spends more money on care and has healthier cats and dogs.
Our Strategy
Our strategy is focused on attracting and retaining members by providing a best-in-class value and member experience. We are
focused on building a successful long-term business by pursuing the following growth strategies:
Increase the number of referring veterinary practices. We intend to increase the number of veterinary practices that are
actively introducing our medical plan to their clients through our Territory Partners and by increasing direct marketing to
veterinarians.
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Increase the number of referrals from active veterinary practices. We intend to continue increasing the number and quality of
interactions that we have with veterinarians to accelerate the rate at which active veterinary practices refer us leads.
Increase the number of third-party referrals from members. We are focused on using innovative technologies to further
enhance our member experience, which we believe will foster member referrals. For example, Trupanion ExpressTM is designed
to facilitate the direct payment of invoices to veterinary practices. If widely adopted, Trupanion ExpressTM would transform the
claims process and could increase referrals from pet owners and veterinarians acting as ambassadors for our brand.
Improve online lead generation and conversion. We are investing in our online marketing capabilities, and intend to continue
to do so in order to fully capture the online opportunity. Our online marketing initiatives have played an integral role in
converting leads to enrolled pets and also generate new leads.
Explore other member acquisition channels. We regularly evaluate new member acquisition channels. We intend to
aggressively pursue those channels that we believe could, over time, generate an attractive ratio of lifetime value relative to
acquisition cost.
Expand internationally. While we are currently focused on capturing the large opportunity in the U.S. and Canadian markets,
we may choose to explore international expansion in the future.
Pursue other revenue opportunities. We may opportunistically engage in other revenue opportunities. For example, American
Pet Insurance Company, which we acquired in 2007, has written policies for an unaffiliated general agent since the end of
2012. As the industry grows and other providers consider entering the pet insurance market, we are well positioned to partner
with them.
Sales and Marketing
Marketing to Veterinarians
Veterinary practices represent our largest referral source. Forming long-term relationships with veterinarians is critical to our
continued success, as we believe veterinary recommendations are highly persuasive to our existing and prospective members
and key to increasing overall acceptance of our medical plan. To reach veterinarians effectively, we utilize a national
independent referral network of Territory Partners. Territory Partners serve as a critical resource for us, as the market for
veterinary services is highly fragmented and includes many sole-owner veterinary practices and small veterinary practices that
are difficult to reach. Our Territory Partners are independent contractors who market our medical plan and are paid fees based
on activity in their regions. We believe this compensation structure aligns our interests and provides a platform that we can
leverage over time.
Sales and Marketing to Pet Owners
We generate leads through a diverse set of third-party referrals and online member acquisition channels, which we then convert
into members through our website and contact center.
• Referrals from third-parties. We actively promote the value of our medical plan with veterinarians, veterinary affiliates
(including purchasing groups and other veterinary membership organizations), corporate employee benefit providers,
shelters and breeders to introduce our medical plan to their clients.
• Online. We believe most of our members spend some time researching pet medical coverage online as part of their
decision-making process. Online advertising represents a large source of new member enrollments. A significant
portion of the members we acquire from online leads come through our paid search marketing, email marketing, social
media marketing and search engine optimization initiatives.
• Referrals from existing members. For the year ended December 31, 2015, 22% of our new pet enrollments were
generated from existing members adding a pet and referring their friends and family.
Our Platform and Technology
We are a data and technology-driven company that has devoted significant resources to developing scalable infrastructures that
leverage state-of-the-art technology frameworks. We have a team of product and engineering professionals dedicated to
enhancing our technology platform and developing new solutions for pet owners and veterinarians.
Our team has developed proprietary, in-house software that forms the backbone of our unique technology platform:
Analytics and pricing engine. Our dynamic analytics platform draws on our extensive library of proprietary data to effectively
and accurately price subscriptions to our medical plan. We leverage a broad range of information, including species, breed, age,
gender and pet location. As data collection is a key part of our research and development process, we are constantly looking for
new and relevant data to collect and shape for this purpose.
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Trupanion ExpressTM. Our software solution for veterinarians facilitates our ability to pay their invoices directly to the
veterinarian at the time of service, often in less than five minutes. Trupanion ExpressTM integrates with veterinarians’ practice
management software, giving us access to more data, reducing our claims handling expense and giving us the ability to deliver
a significantly better experience to our members compared to the traditional reimbursement model.
Trupanion.com. Our website provides a simple interface between Trupanion, consumer and business audiences, which
removes the need for complex steps during the enrollment process. Built using digital asset management and customer
relationship management system technologies, the site provides a custom-built user experience for each user based on who the
user is and how the user arrived at the site.
Competition
We compete with consumers that self-fund veterinary costs with cash or credit, as well as traditional "pet insurance" providers
and new entrants to our market. The vast majority of pet owners in the United States and Canada do not currently have medical
coverage for their pets. We are primarily focused on expanding the overall size of the market by improving the value
proposition for consumers. We view our primary competitive challenge as educating pet owners on why our medical plan is a
better alternative to self-funding.
Additionally, there are traditional insurance companies that provide pet insurance products, either as a stand-alone product or
along with a broad range of other insurance products. The largest of these traditional providers is Nationwide (formerly
Veterinary Pet Insurance Company), a division of Nationwide Insurance. In addition, new entrants backed by large insurance
companies with substantial financial resources have attempted to enter the market in the past and may do so again in the future.
Further, traditional providers may consolidate, resulting in the emergence of new providers that are vertically integrated or able
to create other operational efficiencies, which could lead to increased competition. We believe that we have competitive
strengths that position us favorably related to existing and potential competitors, including a superior value proposition for pet
owners due in part to our vertically integrated structure that reduces frictional costs, a unique member acquisition strategy using
territory partners that has taken 16 years to develop, a proprietary database containing 16 years of historical data that provides
actionable data insights, powerful technology infrastructure and an experienced management team.
Intellectual Property
We rely on federal, state, common law and international rights, as well as contractual restrictions, to protect our intellectual
property. We control access to our proprietary technology, software and documentation by entering into confidentiality and
invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties, such as
service providers, vendors, individuals and entities that may be exploring a business relationship with us.
In addition to these contractual arrangements, we also rely on a combination of intellectual property rights, including trade
secrets, patents, copyrights, trademarks and domain names, as well as contractual protections, to establish and protect our
intellectual property. As of December 31, 2015, we had three pending patent applications in the United States, one pending
patent application in Canada, one pending patent application in Brazil, one pending patent application in Japan, one pending
patent application in China, one pending international patent filed under the Patent Cooperation Treaty, one pending patent
application and one issued patent in Europe. We also had five registered trademarks in the United States, including
“Trupanion,” and five additional trademark applications. We had one registered trademark in Canada, and have and two
additional trademark applications. Many of our unregistered trademarks, however, contain words or terms having a common
usage and, as a result, may not be protectable under applicable law. We also currently hold the “Trupanion.com” Internet
domain name and numerous other related domain names.
Employees
As of December 31, 2015, we had 439 employees. We have not experienced any work stoppages, and we consider our relations
with our employees to be good.
Regulation
Each U.S. state, the District of Columbia and U.S. territories and possessions, as well as all of the Canadian provinces, have
insurance laws that apply to companies licensed to transact insurance business in the jurisdiction. The primary regulator of an
insurance company, however, is located in its state of domicile. Our underwriting subsidiary American Pet Insurance Company
(APIC) is domiciled in New York State and its primary regulator is therefore the New York Department of Financial Services (NY
DFS). APIC is currently licensed to do business in all 50 states, Puerto Rico and the District of Columbia in the United States.
As such, APIC is subject to comprehensive regulation and supervision under U.S. state and federal laws.
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State insurance regulators have broad authority with respect to all aspects of the insurance industry, including the following:
licensing of APIC to transact its line of business and approval and issuance of its certificate of authority;
establishing minimum levels of capital and reserves required by APIC to operate as an ongoing insurance company;
assessing the officers and directors of APIC to ensure a minimum level of competency and trustworthiness;
licensing of individual producers and agents and business entities marketing and selling insurance products and of
claims adjusters settling claims;
admittance of assets to statutory surplus and regulating the type of investments in which APIC can invest;
regulating premium rate levels for the insurance products APIC offers;
approving policy forms APIC issues;
regulating unfair trade and claims practices; and
establishing reserve requirements and solvency standards.
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Regulators also have broad authority to conduct on-site market conduct examinations of our management and operations,
marketing and sales, underwriting, customer service, claims handling and licensing. Market conduct examinations can involve
direct, on-site contact with a company to identify potential regulatory violations, discuss and correct an identified problem or
obtain a better understanding of how the company is operating in the marketplace.
Adverse state insurance regulatory actions could include limiting APIC’s ability to write new policies, limiting APIC’s ability
to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing policies, disallowing
premium increases or policy coverage amendments APIC seeks, reviewing the adequacy and appropriateness of our insurance
products before they can be made available to our members and restricting marketing and sales by our referral sources, contact
centers and producers.
State insurance laws and regulations in the United States require APIC to file financial statements with state insurance
regulators everywhere it is licensed and its operations and accounts are subject to examination at any time. APIC’s statutorily
required financial statements are available to the public. APIC prepares statutory financial statements in accordance with
accounting practices and procedures prescribed or permitted by these regulators. The National Association of Insurance
Commissioners (NAIC) has approved a series of uniform statutory accounting principles (SAP) that have been adopted, in
some cases with minor modifications, by all state insurance regulators. As a basis of accounting, SAP was developed to monitor
and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with
assuring an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting
focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the
insurer’s domiciliary state. The values for assets, liabilities and equity reflected in financial statements prepared in accordance
with U.S. generally accepted accounting principles are usually different from those reflected in financial statements prepared
under SAP.
In Canada, our plan is written by an unaffiliated Canadian-licensed insurer, Omega General Insurance Company (Omega).
Under the terms of our agreements with Omega, our subsidiary Trupanion Brokers Ontario acts as a general agent through a
fronting and reinsurance agreement with Omega pursuant to which Trupanion retains any financial risk associated with our
Canadian business. Effective January 1, 2015, this agreement was restructured to include our segregated cell business,
Wyndham Segregated Account AX (WICL), located in Bermuda. These restructured agreements may be terminated by either
party with one year’s written notice until they terminate pursuant to their terms on December 31, 2017, at which time they will
automatically renew for successive one-year periods and remain terminable by either party with one year’s written notice.
Omega’s Canadian insurance operations are supervised and regulated by the Canadian federal, provincial and territorial
governments. Omega is a fully licensed insurer in all of the Canadian provinces and territories in which we do business.
Though we are not directly regulated by the Bermuda Monetary Authority (BMA), WICL’s regulation and compliance impacts
us as it could have an adverse impact on the ability of Segregated Account AX to pay dividends. WICL is regulated by the
BMA under the Insurance Act of 1978 (Insurance Act) and the Segregated Accounts Company Act of 2000. The Insurance Act
imposes on Bermuda insurance companies solvency and liquidity standards, certain restrictions on the declaration and payment
of dividends and distributions, certain restrictions on the reduction of statutory capital, and auditing and reporting requirements,
and grants BMA the powers to supervise and, in certain circumstances, to investigate and intervene in the affairs of insurance
companies. Under the Insurance Act, WICL as a class 3 insurer is required to maintain available statutory capital and surplus at
a level equal to or in excess of a prescribed minimum established by reference to net written premiums and loss reserves.
Under the Bermuda Companies Act of 1981, as amended, a Bermuda company may not declare or pay a dividend or make a
distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the
payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby
be less than its liabilities. The Segregated Accounts Company Act of 2000 further requires that dividends out of a segregated
account can only be paid to the extent that the cell remains solvent and the value of its assets remain greater than the aggregate
of its liabilities and its issued share capital and share premium accounts.
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Insurance Holding Company Regulation
APIC is subject to laws governing insurance holding companies in New York, its state of domicile. These laws impact us in a
number of ways, including the following:
• We must file periodic information reports with the NY DFS, including information concerning our capital structure,
ownership, financial condition and general business operations.
• New York regulates certain transactions between APIC and our other affiliated entities, including the fee levels
payable by APIC to affiliates that provide services to APIC.
• New York law restricts the ability of any one person to acquire certain levels of our voting securities without prior
regulatory approval. State insurance holding company regulations generally provide that no person, corporation or
other entity may acquire control of an insurance company, or a controlling interest in any parent company of an
insurance company, without the prior approval of such insurance company’s domiciliary state insurance regulator. Any
person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance company is presumed to
have acquired “control” of the company. To obtain approval of any change in control, the proposed acquirer must file
with the applicable insurance regulator an application disclosing, among other information, its background, financial
condition, the financial condition of its affiliates, the source and amount of funds by which it will effect the
acquisition, the criteria used in determining the nature and amount of consideration to be paid for the acquisition,
proposed changes in the management and operations of the insurance company and other related matters. In
considering an application to acquire control of an insurer, the insurance commissioner generally will consider such
factors as the experience, competence and financial strength of the applicant, the integrity of the applicant’s board of
directors and executive officers, the acquirer’s plans for the management and operation of the insurer and any anti-
competitive results that may arise from the acquisition.
• New York law restricts the ability of APIC to pay dividends to its holding company parent. These restrictions are based
in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered
ordinary and may be paid without prior approval, and dividends in larger amounts, or extraordinary dividends, are
subject to approval by the NY DFS. An extraordinary dividend or distribution is defined as a dividend or distribution
that, in the aggregate in any 12-month period exceeds the lesser of (i) 10% of surplus as of the preceding December 31
or (ii) the insurer’s adjusted net investment income for such 12-month period, not including realized capital gains.
Financial Regulation of Insurers
Risk-Based Capital Requirements
The NAIC has adopted risk-based capital requirements for life, health and property and casualty insurance companies. Refer to
“Item 1A. Risk Factors” for details of these requirements.
NAIC Insurance Regulatory Information Systems Ratios
The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory Information System, or
IRIS, to assist state regulators in monitoring the financial condition of U.S. insurance companies and identifying companies
requiring special attention or action. IRIS consists of a statistical phase and an analytical phase whereby financial examiners
review insurers’ annual statements and financial ratios. The statistical phase consists of 12 key financial ratios based on year-
end data that are generated from the NAIC database annually; each ratio has a “usual range” of results. For IRIS ratio purposes,
APIC submits data annually to state insurance regulators who then analyze our data using prescribed financial data ratios. A
ratio falling outside the prescribed “usual range” is not considered a failing result. Rather, unusual values are viewed as part of
the regulatory early monitoring system. In many cases, it is not unusual for financially sound companies to have one or more
ratios that fall outside the usual range. As of December 31, 2015, APIC had three such ratios outside the usual range, relating to
net premiums written to surplus, change in net premiums written and investment yield.
Regulators may investigate or monitor an insurance company if its IRIS ratios fall outside the prescribed usual range. The
inquiries made by state insurance regulators into an insurance company’s IRIS ratios can take various forms. In some instances,
regulators may require the insurance company to provide a written explanation as to the causes of the particular ratios being
outside the usual range, management’s actions to produce results that will be within the usual range in future years and what, if
any, actions the insurance company’s domiciliary state insurance regulators have taken. Regulators are not required to take
action if an IRIS ratio is outside the usual range, but, depending on the nature and scope of the particular insurance company’s
exception, regulators may request additional information to monitor going forward and, as a consequence, may take additional
regulatory action.
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Insurance Guaranty Associations, Residual Markets, Wind Pools and State-specific Reinsurance Mechanisms
Most jurisdictions in which we operate have laws or regulations that require insurance companies doing business in the state to
participate in various types of guaranty associations or other similar arrangements designed to protect policyholders from losses
under insurance policies issued by insurance companies that become impaired or insolvent. Typically, these associations levy
assessments, up to prescribed limits, on member insurers on the basis of the member insurer’s proportionate share of the
business in the relevant jurisdiction in the lines of business in which the impaired or insolvent insurer is engaged. Some
jurisdictions permit member insurers to recover assessments that they paid through full or partial premium tax offsets, usually
over a period of years.
Some states in which APIC operates have residual markets, wind pools or state reinsurance mechanisms. The general intent
behind these is to provide coverage to individuals and businesses that cannot find coverage in the private marketplace. The
intent of state-specific reinsurance mechanisms generally is to stabilize the cost of, and ensure access to, reinsurance for
admitted insurers writing business in the state. Historically, APIC has had minimal financial exposure to guaranty associations,
residual markets, wind pools and state-specific reinsurance mechanisms; however there is no guarantee that these items will
continue to be of low financial impact to APIC.
Licensing of Producers and Other Entities
Insurance agencies, producers, third-party administrators, claims adjusters, service providers and administrators are subject to
licensing requirements and regulation by insurance regulators in various jurisdictions in which they conduct business. If any of
our subsidiaries, referral sources, contact centers or service providers engage in these functions, they will be subject to
licensing requirements and regulation by insurance regulators in various jurisdictions. If a subsidiary, referral source, contact
center or service provider does not comply with licensing requirements and regulation by any insurance regulator, such
insurance regulator could penalize such entity, including restricting certain activity of such entity.
Federal Initiatives
The U.S. federal government generally does not directly regulate the insurance business. From time to time, various regulatory
and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been, or are at
present being, considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of
state regulation of insurers and proposals in various state legislatures (some of which have been enacted) to conform portions of
their insurance laws and regulations to various model acts adopted by the NAIC. The NAIC has undertaken a Solvency
Modernization Initiative focused on updating the U.S. insurance solvency regulation framework, including capital
requirements, governance and risk management, group supervision, accounting and financial reporting and reinsurance. The
NAIC Amendments are a result of these efforts. Additional requirements are also expected.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a Federal
Insurance Office within the U.S. Department of the Treasury. The Federal Insurance Office initially is charged with monitoring
all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance),
gathering data and conducting a study on methods to modernize and improve the insurance regulatory system in the United
States. It is not possible to predict whether, in what form or in what jurisdictions any of these proposals might be adopted, or
the effect federal involvement in insurance will have, if any, on us.
Privacy and Data Collection Regulation
There are numerous federal, state and foreign laws regarding privacy and the protection of member data. The regulatory
environment in this area for online businesses is very unsettled in the United States and internationally and new legislation is
frequently being proposed and enacted.
In the area of information security and data protection, many states have passed laws requiring notification to users when there
is a security breach for personal data, such as the Massachusetts Data Breach Notification Law, or requiring the adoption of
minimum information security standards that are often vaguely defined and difficult to practically implement. In addition, our
operations subject us to certain payment card association operating rules, certification requirements and rules, including the
Payment Card Industry Data Security Standard, a security standard for companies that collect, store or transmit certain data
regarding credit and debit cards, credit and debit card holders and credit and debit card transactions.
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Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology
or data to develop products that may compete with our offerings. Policing unauthorized use of our technology or data is
difficult. The laws of other countries in which we market our medical plan may offer little or no effective protection of our
proprietary technology. Our competitors could also independently develop technologies equivalent to ours, and our intellectual
property rights may not be broad enough for us to prevent competitors from selling products incorporating those technologies.
Companies in our industry and in other industries may own a large number of patents, copyrights and trademarks and may
frequently request license agreements, threaten litigation or file suit against us based on allegations of infringement or other
violations of intellectual property rights. From time to time, we face, and we expect to face in the future, allegations that we
have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including our
competitors. As we face increasing competition and as our business grows, we will likely face more claims of infringement.
Information About Segments and Geographic Revenue
Information about segments and geographic revenue is set forth in Note 13 of the Notes to Consolidated Financial Statements
under Item 8 of this Annual Report on Form 10-K. In addition, financial information regarding our operations, assets and
liabilities, including our total net revenue and net loss for the years ended December 31, 2015, 2014 and 2013 and our total
assets as of December 31, 2015 and 2014, is included in our Consolidated Financial Statements under Item 8 of this Annual
Report on Form 10-K.
Corporate Information
We were founded in Canada in 2000 as Vetinsurance Ltd. In 2006, we effected a business reorganization whereby Vetinsurance
Ltd. became a consolidated subsidiary of Vetinsurance International, Inc., a Delaware corporation. In 2007, we began doing
business as Trupanion. In 2013, we formally changed our name from Vetinsurance International, Inc. to Trupanion, Inc. Our
principal executive offices are located at 907 NW Ballard Way, Seattle, Washington 98107, and our telephone number is
(855) 268-9606. Our website address is www.trupanion.com. Information contained on, or that can be accessed through, our
website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part
of this Annual Report on Form 10-K.
Available Information
We are required to file annual, quarterly and other reports, proxy statements and other information with the Securities and
Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (Exchange Act). We also make
available, free of charge on the investor relations portion of our website at investors.trupanion.com, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with
the SEC. You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the
SEC’s Public Reference Room located at 100 F Street, NE, Washington D.C 20549 on official business days during the hours
of 10 a.m. to 3 p.m. Eastern time. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public
Reference Rooms. The SEC also maintains an Internet website at www.sec.gov/ where you can obtain our SEC filings. You
can also obtain paper copies of these reports, without charge, by contacting Investor Relations at
InvestorRelations@Trupanion.com.
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Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties
described below, together with all of the other information in this report, including our consolidated financial statements
and related notes, as well as in our other filings with the SEC, in evaluating our business and before investing in our
common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties
that are not expressly stated, that we are unaware of, or that we currently believe are not material, may also become
important factors that affect us. If any of the following risks occur, our business, operating results, financial condition and
prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or
all of your investment.
Risks Related to Our Business and Industry
We have incurred significant net losses since our inception and may not be able to achieve or maintain profitability in the
future.
We have incurred significant net losses since our inception. We had a net loss of $17.2 million for the year ended December 31,
2015. Additionally, as of December 31, 2015, our accumulated deficit was $74.4 million. We have funded our operations
through equity financings and borrowings under a revolving line of credit and term loans. We may not be able to achieve or
maintain profitability in the near future or at all. Our recent growth, including our growth in revenue and membership, may not
be sustainable or may decrease, and we may not generate sufficient revenue to achieve or maintain profitability. Additionally,
our expense levels are based, in significant part, on our estimates of future revenue and many of these expenses are fixed in the
short term. As a result, we may be unable to adjust our spending in a timely manner if our revenue falls short of our
expectations. Accordingly, any significant shortfall of revenue in relation to our estimates could have an immediate negative
effect on our financial results.
We have made and plan to continue to make significant investments to grow our member base. Our average pet acquisition cost
and the number of new pets we enroll depends on a number of factors, including the effectiveness of our sales execution and
marketing initiatives, changes in costs of media, the mix of our sales and marketing expenditures and the competitive
environment. Our average pet acquisition cost has in the past significantly varied and in the future may significantly vary from
period to period based upon specific marketing initiatives. We also regularly test new member acquisition channels and
marketing initiatives, which often are more expensive than our traditional marketing channels and generally increase our
average acquisition costs. We plan to expand the number of Territory Partners we use to reach veterinarians and other referral
sources and to engage in other marketing activities, including direct to consumer advertising, which are likely to increase our
acquisition costs.
We expect to continue to make significant expenditures to maintain and expand our business, including expenditures relating to
the acquisition of new members, retention of our existing members and development and implementation of our technology
platforms. These increased expenditures will make it more difficult for us to achieve and maintain future profitability. Our
ability to achieve and maintain profitability depends on a number of factors, including our ability to attract and service
members on a profitable basis. If we are unable to achieve or maintain profitability, we may not be able to execute our business
plan, our prospects may be harmed and our stock price could be materially and adversely affected.
We base our decisions regarding our member acquisition expenditures primarily on the projected lifetime value of the pets
that we expect to acquire. Our estimates and assumptions may not accurately reflect our future results, we may overspend
on member acquisition and we may not be able to recover our member acquisition costs or generate profits from these
investments.
We invest significantly in member acquisition. We spent $15.2 million on sales and marketing to acquire new members for the
year ended December 31, 2015. We expect to continue to spend significant amounts to acquire additional members. We utilize
Territory Partners, who are paid fees based on activity in their regions, to communicate the benefits of our medical plan to
veterinarians through in-person visits. Veterinarians then educate pet owners, who visit our website or call our contact center to
learn more about, and potentially enroll in, our medical plan. We also invest in other third-party referrals and direct to consumer
member acquisition channels, though we have limited experience with some of them.
We base our decisions regarding our member acquisition expenditures primarily on the lifetime value of the pets that we project
to acquire. This analysis depends substantially on estimates and assumptions based on our historical experience with pets
enrolled in earlier periods, including our key financial and operating metrics described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics.”
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If our estimates and assumptions regarding the lifetime value of the pets that we project to acquire and our related decisions
regarding investments in member acquisition prove incorrect, or if the expected lifetime value of the pets that we project to
acquire differs significantly from that of pets acquired in prior periods, we may be unable to recover our member acquisition
costs or generate profits from our investment in acquiring new members. Moreover, if our member acquisition costs increase or
we invest in member acquisition channels that do not ultimately result in any or an adequate number of new member
enrollments, the return on our investment may be lower than we anticipate irrespective of the lifetime value of the pets that we
project to acquire as a result of the new members. If we cannot generate profits from this investment, we may need to alter our
growth strategy, and our growth rate and operating results may be adversely affected.
If we are unable to maintain high member retention rates, our growth prospects and revenue will be adversely affected.
We have historically experienced high average monthly retention rates. For example, our average monthly retention rate was
98.6% in 2015. If our efforts to satisfy our existing members are not successful, we may not be able to maintain our retention
rates. Members we obtain through aggressive promotions or other channels that involve relatively less meaningful contact
between us and the member may be more likely to terminate their medical plan subscription. In the past we have experienced
reduced retention rates during periods of rapid member growth, as our retention rate generally has been lower during the first
year of member enrollment. Members may choose to terminate their medical plan subscription for a variety of reasons,
including increased subscription fees, perceived or actual lack of value, delays or other unsatisfactory experiences in claims
administration, unsatisfactory member service, an economic downturn, loss of a pet, a more attractive offer from a competitor,
changes in our medical plan or other reasons, including reasons that are outside of our control. When a member terminates his
or her medical plan subscription, we no longer receive the related revenue and may not be able to recover the member
acquisition cost or other expenses, including claims expenses, related to that member. Our cost of acquiring a new member is
substantially greater than the cost involved in maintaining our relationship with an existing member. If we are not able to
successfully retain existing members and limit medical plan subscription terminations, our revenue and operating margins will
be adversely impacted and our business, operating results and financial condition would be harmed.
The prices of our medical plan subscriptions are based on assumptions and estimates and may be subject to regulatory
approvals. If our actual experience differs from the assumptions and estimates used in pricing our medical plan
subscriptions or if we are unable to obtain any necessary regulatory pricing approvals we need, at all or in a timely manner,
our revenue and financial condition could be adversely affected.
The pricing of our medical plan subscriptions reflect expected claim payment patterns derived from assumptions that we make
regarding a number of factors, including a pet’s species, breed, age, gender and location. Factors related to pet location include
the current and assumed changes in the cost and availability of veterinary technology and treatments and local veterinary
practice preferences. The prices of our medical plan subscriptions also include assumptions and estimates regarding our own
operating costs and expenses. We monitor and manage our pricing and overall sales mix to achieve target returns. Profitability
from new members emerges over a period of years depending on the nature and length of time a pet is enrolled in our medical
plan, and is subject to variability as actual results may differ from pricing assumptions. If the subscription fees we collect are
insufficient to cover actual claim costs, operating costs and expenses within anticipated pricing allowances, or if our member
retention rates are not high enough to ensure recovery of member acquisition costs, then our gross profit could be adversely
affected and our revenue may be insufficient to achieve profitability. Conversely, if our pricing assumptions differed from
actual results such that we overpriced risks, our competitiveness and growth prospects could be adversely affected. Further,
even if our pricing assumptions are accurate, we may not be able to obtain the necessary regulatory approvals for any pricing
changes that we may determine are appropriate based on our pricing assumptions, which could prevent us from obtaining
sufficient revenue from medical plan subscriptions to cover claims expenses, pet acquisition costs and other expenses in any
such jurisdiction unless and until such regulatory approvals are obtained in appropriate amounts.
The anticipated benefits of our analytics platform may not be fully realized.
Our analytics platform draws upon our proprietary pet data to price our medical plan subscriptions. The assumptions we make
about breeds and other factors in pricing medical plan subscriptions may prove to be inaccurate, and, accordingly, these pricing
analytics may not accurately reflect the claims expense that we will ultimately incur. Furthermore, if any of our competitors
developed similar or better data systems, adopted similar or better underwriting criteria and pricing models or received our
data, our competitive advantage could decline or be lost.
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Our actual claims expenses may exceed our current reserve established for claims and may adversely affect our operating
results and financial condition.
As of December 31, 2015, our claims reserve was $6.3 million. Our recorded claims reserve is based on our best estimates of
claims, both reported and incurred but not reported, after considering known facts and interpretations of circumstances. We
consider internal factors, including data from our proprietary data analytics platform, experience with similar cases, actual
claims paid, historical trends involving claim payment patterns, pending levels of unpaid claims, claims management programs
and contractual terms. We may also consider external factors, including changes in the law, court decisions, changes to
regulatory requirements and economic conditions. Because reserves are estimates of the unpaid portion of claims that have
occurred, including claims incurred but not reported, the establishment of appropriate reserves is an inherently uncertain and
complex process that involves significant subjective judgment. Further, we do not transfer or cede our risk as an insurer and,
therefore, we maintain more risk than we would if we purchased reinsurance. The ultimate cost of claims may vary materially
from recorded reserves, and such variance may result in adjustments to the claims reserve, which could have a material effect
on our operating results.
We rely significantly on Territory Partners, veterinarians and other third parties to recommend our medical plan to potential
members.
We rely significantly on Territory Partners and other third parties to cultivate direct veterinary relationships and build
awareness of the benefits that our medical plan offers veterinarians and their clients. In turn, we rely on veterinarians to
introduce and refer our medical plan to their clients. We also rely significantly on other third parties, such as existing members,
online and offline businesses, animal shelters, breeders and veterinary affiliates, including veterinarian purchasing groups and
associations, to help generate leads for our medical plan subscriptions. Veterinary practices represent our largest member
acquisition channel, accounting for approximately 75% of our enrollments in the year ended December 31, 2015, excluding
existing members adding pets and referring their friends and family members. Many factors influence the success of our
relationships with these referral sources, including:
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the continued positive market presence, reputation and growth of our company and of the referral sources;
the effectiveness of referral sources;
the decision of any such referral source to support one or more of our competitors;
the interest of the referral sources’ customers or clients in the medical plan we offer;
the relationship and level of trust between Territory Partners and veterinarians, and between us and the referral source;
the percentage of the referral sources’ customers or clients that submit applications or use trial certificates to enroll in
a medical plan through our website or contact center;
our ability to implement or maintain any marketing programs, including trial certificates, in any jurisdiction; and
our ability to work with the referral source to implement any changes in our marketing initiatives, including website
changes, infrastructure and technology and other programs and initiatives necessary to generate positive consumer
experiences.
In order for us to implement our business strategy and grow our revenue, we must effectively maintain and increase the number
and quality of our relationships with Territory Partners, veterinarians and other referral sources, and continue to scale and
improve our processes, programs and procedures that support them. Those processes, programs and procedures could become
increasingly complex and difficult to manage. We expend significant time and resources attracting qualified Territory Partners
and providing them with complete and current information about our business. Their relationship with us may be terminated at
any time, and, if terminated, we may not recoup the costs associated with educating them about our medical plan or be able to
maintain any relationships they may have developed with veterinarians within their territories. Further, if we experience an
increase in the rate at which Territory Partner relationships are terminated, we may not develop or maintain relationships with
veterinarians as quickly as we have in the past. If the financial cost to maintain our relationships with Territory Partners
outweighs the benefits provided by Territory Partners, or if they feel unsupported or undervalued by us and terminate their
relationship with us, our growth and financial performance could be adversely affected.
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The success of our relationships with veterinary practices depends on the overall value our medical plan can provide to
veterinarians. If the scope of our medical plan coverage is perceived to be inadequate or our claims settlement process is
unsatisfactory to the veterinarian’s clients because, for example, our coverage is insufficient, member requests for
reimbursement are denied or we fail to timely settle and pay veterinary invoices, veterinarians may be unwilling to recommend
our medical plan to their clients and they may encourage their existing clients who have subscribed to our medical plan to stop
subscribing to our medical plan or to purchase a competing product. If veterinarians determine our medical plan is unreliable,
cumbersome or otherwise does not provide sufficient value, they may terminate their relationship with us or begin
recommending a competing product, which could negatively impact our ability to increase our member base and grow our
business.
If we fail to establish or are unable to maintain successful relationships with Territory Partners, veterinarians and other referral
sources, or experience an increase in the rate at which any of these relationships are terminated, it could negatively impact our
ability to increase and retain our member base and our financial results. If we are unable to maintain our existing member
acquisition channels and/or continue to add new member acquisition channels, if the cost of our existing sources increases or
does not scale as we anticipate, or if we are unable to continue to use any existing channels or programs in any jurisdiction,
including our trial certificate program, our member levels and sales and marketing expenses may be adversely affected.
Territory Partners are independent contractors and, as such, may pose additional risks to our business.
Territory Partners are independent contractors and, accordingly, we are not in a position to provide the same direction,
motivation and oversight over Territory Partners as we otherwise could if Territory Partners were our own employees. Territory
Partners may decide not to participate in our marketing initiatives or training opportunities, accept our introduction of new
solutions or comply with our policies and procedures applicable to the Territory Partners, any of which may adversely affect
our ability to develop relationships with veterinarians and grow our membership. Our sole recourse against Territory Partners
who fail to perform is to terminate their contract, which could also trigger contractually obligated termination payments or
result in disputes, including threatened or actual legal or regulatory proceedings. In addition, termination of these contracts may
trigger termination penalties that obligate us to pay significantly more than the amounts that otherwise would have been paid to
the terminated Territory Partner.
We believe that Territory Partners are not and should not be classified as employees under existing interpretations of the
applicable laws of the jurisdictions in which we operate. We do not pay or withhold any employment tax with respect to or on
behalf of Territory Partners or extend any benefits to them that we generally extend to our employees, and we otherwise treat
Territory Partners as independent contractors. Applicable authorities or the Territory Partners have in the past questioned and
may in the future challenge this classification. Further, the applicable laws or regulations, including tax laws or interpretations,
may change. If it were determined that we had misclassified any of our Territory Partners, we may be subjected to penalties or
be required to pay withholding taxes for, extend employee benefits to, provide compensation for unpaid overtime to, or
otherwise incur substantially greater expenses with respect to, Territory Partners.
Any of the foregoing circumstances could have a material adverse impact on our operating results and financial condition.
Our member base has grown rapidly in recent periods, and we may not be able to maintain the same rate of membership
growth.
Our ability to grow our business and to generate revenue depends significantly on attracting new members. For the year ended
December 31, 2015, we generated 91% of our revenue from medical plan subscriptions. In order to continue to increase our
membership, we must continue to offer a medical plan that provides superior value to our members. Our ability to continue to
grow our membership will also depend in part on the effectiveness of our sales and marketing programs. Our member base may
not continue to grow or may decline as a result of increased competition or the maturation of our business.
We may not maintain our current rate of revenue growth.
Our revenue has increased quickly and substantially in recent periods. We believe that our continued revenue growth will
depend on, among other factors, our ability to:
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improve our market penetration through efficient and effective sales and marketing programs to attract new members;
• maintain high retention rates;
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increase the lifetime value per pet;
• maintain positive relationships with veterinarians and other referral sources, and convince them to recommend our
medical plan;
• maintain positive relationships with and increase the number and efficiency of Territory Partners;
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continue to offer a superior value medical plan with competitive features and rates;
accurately price our medical plan subscriptions in relation to actual membership claims costs and operating expenses;
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provide our members with superior member service, including a timely and efficient claims experience and by
recruiting, integrating and retaining skilled and experienced claims personnel who can appropriately and efficiently
adjudicate member claims;
generate new and maintain existing relationships and programs in our other business segment;
recruit, integrate and retain skilled, qualified and experienced sales department professionals who can demonstrate our
value proposition to new and existing members;
react to changes in technology and challenges in the industry, including from existing and new competitors;
increase awareness of and positive associations with our brand; and
successfully respond to any regulatory matters and defend any litigation.
You should not rely on our historical rate of revenue growth as an indication of our future performance.
Our use of capital may be constrained by risk-based capital regulations.
Our subsidiary, American Pet Insurance Company, is subject to risk-based capital regulations that require us to maintain certain
levels of surplus to support our overall business operations in consideration of our size and risk profile. We have in the past and
may in the future fail to maintain the amount of risk-based capital required to avoid additional regulatory oversight, which was
$24.5 million as of December 31, 2015. To comply with these regulations and our related contractual obligations, we may be
required to maintain capital that we would otherwise invest in our growth and operations, which may require us to modify our
operating plan or marketing initiatives, delay the implementation of new solutions or development of new technologies,
decrease the rate at which we hire additional personnel and enter into relationships with Territory Partners, incur indebtedness
or pursue equity or debt financings or otherwise modify our business operations, any of which could have a material adverse
effect on our operating results and financial condition.
Unexpected increases in the severity or frequency of claims may negatively impact our operating results.
Unexpected changes in the severity or frequency of claims may negatively impact our operating results. Changes in claims
severity are driven primarily by inflation in the cost of veterinary care and the increasing availability and usage of expensive,
technologically advanced medical treatments. Increases in claims severity also could arise from unexpected events that are
inherently difficult to predict, such as a pandemic that spreads through the pet population, tainted pet food or supplies or an
unusually high number of serious injuries or illnesses. Our loss management initiatives may not successfully or timely identify
or mitigate any such future increases in claim severity. In addition, we may experience volatility in claim frequency from time
to time, and short-term trends may not continue over the longer term. The frequency of claims may be affected by the level of
care and attentiveness an owner provides to the pet, the pet’s breed and age and other factors outside of our control, as well as
fluctuations in member retention rates and by new member initiatives that encourage more frequent claims and other new
member acquisition activities. A significant increase in claim severity or frequency could increase our cost of revenue and have
a material adverse effect on our financial condition.
Changes in the Canadian currency exchange rate may adversely affect our revenue and operating results.
We offer our medical plan in Canada, which exposes us to the risk of changes in the Canadian currency exchange rates. As of
December 31, 2015, approximately 21% of our total revenue was generated in Canada. Fluctuations in the relative strength of
the Canadian economy and the Canadian dollar has in the past and could in the future adversely affect our revenue and
operating results.
Our success depends on our ability to adjust member claims quickly and accurately.
We must accurately evaluate and quickly pay member claims in a manner that gives them a high satisfaction level. Many
factors can affect our ability to pay member claims accurately, quickly and in a manner that gives our members high
satisfaction, including the training, experience and skill of our personnel, our ability to reduce the number of claims requests
made for non-covered conditions, our ability to recognize and respond to fraudulent or inflated claims requests, the
department’s culture and the effectiveness of its management, and our ability to develop or select and implement appropriate
procedures, technologies and systems to support our member claims functions. Our failure to pay claims requests fairly,
accurately and in a timely manner, or to deploy resources appropriately, could result in unanticipated costs to us, lead to
material litigation, undermine member goodwill and our reputation, and impair our brand image and, as a result, materially and
adversely affect our competitiveness, financial results, prospects and liquidity.
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We are and will continue to be faced with many competitive challenges, any of which could adversely affect our prospects,
operating results and financial condition.
We compete with pet owners that self-finance unexpected veterinary invoices with savings or credit, as well as traditional "pet
insurance" providers and relatively new entrants into our market. The vast majority of pet owners in the United States and
Canada do not currently have medical coverage for their pets. We are focused primarily on expanding the overall size of the
market, and we view our primary competitive challenge as educating pet owners on why our medical plan is a better alternative
to self-financing.
Additionally, there are traditional insurance companies that provide pet insurance products, either as a stand-alone product or
along with a broad range of other insurance products. The largest of these traditional "pet insurance" providers is Nationwide
Pet (formerly Veterinary Pet Insurance Company), a division of Nationwide Insurance. In addition, new entrants backed by
large insurance companies have attempted to enter the pet insurance market in the past and may do so again in the future.
Further, traditional "pet insurance" providers may consolidate, resulting in the emergence of new providers that are vertically
integrated or able to create other operational efficiencies, which could lead to increased competition.
Some of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition
and significantly greater financial, technical, marketing and other resources than we do. Some of our competitors may be able
to undertake more extensive marketing initiatives for their brands and services, devote more resources to website and systems
development and make more attractive offers to potential employees, referral sources and third-party service providers.
To compete effectively, we will need to continue to invest significant resources in sales and marketing, in improving the service
at our contact center and claims department, in the online experience and functionalities of our website and in other
technologies and infrastructure. Failure to compete effectively against our current or future competitors could result in loss of
current or potential members, medical plan subscription terminations or a reduction in member retention rates, which could
adversely affect our pricing, lower our revenue and prevent us from achieving or maintaining profitability. We may not be able
to compete effectively for members in the future against existing or new competitors, and the failure to do so could result in
loss of existing or potential members, increased sales and marketing expenses or diminished brand strength, any of which could
harm our business.
If we are not successful in cost-effectively converting visitors to our website and contact center into members, our business
and operating results would be harmed.
Our growth depends in large part upon growth in our member base. We seek to convert consumers who visit our website and
call our contact center into members. The rate at which consumers visiting our website and contact center seeking to enroll in
our medical plan are converted into members is a significant factor in the growth of our member base. A number of factors have
influenced, and could in the future influence, the conversion rates for any given period, some of which are outside of our
control. These factors include:
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the competitiveness of the medical plan we offer, including its perceived value, coverage, simplicity and fairness;
changes in consumer shopping behaviors due to circumstances outside of our control, such as economic conditions
and consumers’ ability or willingness to pay for a pet medical plan;
the quality of and changes to the consumer experience, including on our website or with our contact center or claims
department;
regulatory requirements, including those that make the experience on our website cumbersome or difficult to navigate
or that hinder our call center or claims department’s ability to speak with potential members quickly and in a way that
is conducive to converting leads, enrolling new pets, and/or resolving member concerns;
system failures or interruptions in the operation of our abilities to write policies or operate our website or contact
center; and
changes in the mix of consumers who are referred to us through various member acquisition channels, such as
veterinary referrals, existing members adding a pet and referring their friends and family members and other third-
party referrals and online member acquisition channels.
Our ability to convert consumers into members can be impacted by a change in the mix of referrals received through our
member acquisition channels. In addition, changes to our website or contact center, or other programs or initiatives we
undertake, may adversely impact our ability to convert consumers into members at our current rate, or at all. These changes
may have the unintended consequence of adversely impacting our conversion rates. A decline in the percentage of members
who enroll in our medical plan on our website or telephonically through our contact center also could result in increased
member acquisition costs. To the extent the rate at which we convert consumers into members suffers, the growth rate of our
member base may decline, which would harm our business, operating results and financial condition.
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We have made and plan to continue to make substantial investments in features and functionality for our website and training
and staffing for our contact center that are designed to generate traffic, increase member engagement and improve new and
existing member service. These activities do not directly generate revenue, however, and we may never realize any benefit from
these investments. If the expenses that we incur in connection with these activities do not result in sufficient growth in
members to offset the cost, our business, operating results and financial condition will be adversely affected.
If we are unable to maintain and enhance our brand recognition and reputation, our business and operating results will be
harmed.
We believe that maintaining and enhancing our brand recognition and reputation is critical to our relationships with existing
members, Territory Partners, veterinarians and other referral sources, and to our ability to attract new members, new Territory
Partners, additional supportive veterinarians and other referral sources. We also believe that the importance of our brand
recognition and reputation will continue to increase as competition in our market continues to develop and mature. Our success
in this area will depend on a wide range of factors, some of which are out of our control, including the following:
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the efficacy and viability of our sales and marketing programs;
the perceived value of our medical plan;
quality of service provided by our contact center and claims professionals, including the fairness, ease and timeliness
of our claims administration process;
actions of our competitors, Territory Partners, veterinarians and other referral sources;
positive or negative publicity, including regulatory pronouncements and material on the Internet or social media;
regulatory and other government-related developments; and
litigation-related developments.
The promotion of our brand may require us to make substantial investments, and we anticipate that, as our market becomes
increasingly competitive, these branding initiatives may become increasingly difficult and expensive. Our brand promotion
activities may not be successful or yield increased revenue, and to the extent that these activities result in increased revenue, the
increased revenue may not offset the expenses we incur and our operating results could be harmed. If we do not successfully
maintain and enhance our brand, our business may not grow and our relationships with veterinarians and other referral sources
could be terminated, which would harm our business, operating results and financial condition.
Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, our employees, our
strategic partners, our affiliates, or others associated with any of these parties, may tarnish our reputation and reduce the value
of our brands. Damage to our reputation and loss of brand equity may reduce demand for our services and have an adverse
effect on our business, operating results, and financial condition. Moreover, any attempts to rebuild our reputation and restore
the value of our brands may be costly and time consuming, and such efforts may not ultimately be successful.
Our business depends on our ability to maintain and scale the infrastructure necessary to operate our technology platform.
Our business depends on our ability to maintain and scale the infrastructure necessary to operate our technology platform,
which includes our analytics and pricing engine, claims management systems, customer relationship management system,
contact center phone system and website. We use these technology frameworks to price our medical plan subscriptions, enroll
members, engage with current members and administer member claims under our medical plan. Additionally, our members
review and purchase subscriptions to our medical plan and submit reimbursement requests through our website and contact
center. Our reputation and ability to acquire, retain and serve our members depends on the reliable performance of our
technology platform and the underlying network systems and infrastructure, and on providing best-in-class member service,
including through our contact center and website. As our member base continues to grow, the amount of information collected
and stored on the systems and infrastructure supporting our technology platform will continue to grow, and we expect to require
an increasing amount of network capacity, computing power and information technology personnel to develop and maintain our
technology platform and service our departments involved in member interaction.
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We have made, and expect to continue to make, substantial investments in equipment and related network infrastructure to
handle the operational demands on our technology platform, including increasing data collection, software development, traffic
on our website and the volume of calls at our contact center. The operation of the systems and infrastructure supporting our
technology platform is expensive and complex and could experience operational failures. In the event that our data collection,
member base or amount of traffic on these systems grows more quickly than anticipated, we may be required to incur
significant additional costs to increase the capacity in our systems. Any system failure that causes an interruption in or
decreases the responsiveness of our services could impair our revenue-generating capabilities, harm our business and operating
results and damage our reputation. In addition, any loss or mishandling of data could result in breach of confidence,
competitive disadvantage or loss of members, and subject us to potential liability. Any failure of the systems and infrastructure
that we rely on could negatively impact our enrollments as well as our relationship with members. If we do not maintain or
expand the systems and infrastructure underlying our technology platform successfully, or if we experience operational failures,
our reputation could be harmed and we could lose current and potential members, which could harm our operating results and
financial condition.
We have made, and may continue to make, significant investments in new solutions and enhancements to our technology
platform. These new solutions and enhancements may not be successful, and we may not recognize the expected benefits.
We have a team of product and engineering professionals dedicated in part to enhancing our technology platform and
developing new solutions. We have made, and may continue to make, significant investments in these new solutions and
enhancements. For example, we have made significant investments in Trupanion ExpressTM, which is designed to facilitate the
direct payment of invoices to veterinary practices. These development and implementation activities may not be successful, and
we may incur delays or cost overruns or elect to curtail our currently planned expenditures related to them. Further, if or when
these new solutions or enhancements are introduced, they may not be well received by veterinarians or by new or existing
members, particularly if they are costly, cumbersome or unreliable and, even if they are well-received, they may be or become
obsolete due to technological reasons or to the availability of alternative solutions in the marketplace. If new solutions and
enhancements are not successful on a long-term basis, we may not recognize benefits from these investments, and our business
and financial condition could be adversely affected.
If we fail to effectively manage our growth, our business, operating results and financial condition may suffer.
We have recently experienced, and expect to continue to experience, significant growth, which has placed, and may continue to
place, significant demands on our management and our operational and financial systems and infrastructure. We expect that our
growth strategy will require us to commit substantial financial, operational and technical resources. It may also result in
increased costs, including unexpected increases in our underlying costs (such as member acquisition costs or the frequency or
severity of claims costs) generated by our new business, which could prevent us from becoming profitable and could impair our
ability to compete effectively for pet medical plan business. Additionally, we have in the past, and may in the future, experience
increases in medical plan subscription terminations as our membership grows, which negatively affects our retention rate. If we
do not effectively manage growth at any time, our financial condition could be harmed and the quality of our services could
suffer.
In order to successfully expand our business, we need to hire, integrate and retain highly skilled and motivated employees. We
also need to continue to improve our existing systems for operational and financial management. These improvements could
require significant capital expenditures and place increasing demands on our management. We may not be successful in
managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not
successfully implement improvements in these areas, our business, operating results and financial condition will be harmed.
Our operating results may vary, which could cause the trading price of our stock to fluctuate or decline, make period-to-
period comparisons less meaningful, and make our future results difficult to predict.
We may experience fluctuations in our revenue, expenses and operating results in future periods. Our operating results may
fluctuate in the future as a result of a number of factors, many of which are beyond our control. These fluctuations may lead
analysts to change their long-term models for valuing our common stock, cause us to face short-term liquidity issues, impact
our ability to retain or attract key personnel or cause other unanticipated issues, all of which could result in declines in our
stock price. Moreover, these fluctuations may make comparing our operating results on a period-to-period basis less
meaningful and make our future results difficult to predict. You should not rely on our past results as an indication of our future
performance. In addition, if revenue levels do not meet our expectations, our operating results and ability to execute on our
business plan are likely to be harmed. In addition to the other factors listed in this “Risk Factors” section, factors that could
affect our operating results include the following:
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our ability to retain our current members and grow our member base;
the level of operating expense we elect to incur related to sales and marketing and technology and development
initiatives that are discretionary in nature;
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the effectiveness of our sales and marketing programs;
our ability to improve veterinarians’ and other third-parties’ willingness to recommend our medical plan;
the timing, volume and severity of our claims and the adequacy of our claims reserve;
our ability to accurately price our medical plans;
regulatory limitations or other constraints on our ability or our willingness to implement pricing changes;
the level of demand for and the cost of our medical plan subscriptions or those of our competitors;
fluctuations in applicable foreign currency exchange rates;
the perceived value of our medical plan to veterinarians and pet owners;
spending decisions by our members and prospective members;
our costs and expenses, including pet acquisition costs and claims expenses;
our ability to expand the scope and efficiency of our Territory Partner network;
our ability to effectively manage our growth;
the effects of increased competition in our business;
our ability to keep pace with changes in technology and our competitors;
the impact of any security incidents or service interruptions;
costs associated with defending any regulatory action or litigation or with enforcing our intellectual property,
contractual or other rights;
the impact of economic conditions on our revenue and expenses; and
changes in government regulation affecting our business.
Seasonal or periodic variations in the behavior of our members also may cause fluctuations in our financial results. Enrollment
in our medical plan may be discretionary in nature and may be sporadic, reflecting overall economic conditions, budgeting
constraints, pet-buying patterns and a variety of other factors, many of which are outside our control. For example, we expect
to experience some effects of seasonal trends in visits to veterinarians in the fourth quarter and in the beginning of the first
quarter of each year in connection with the traditional holiday season. While we believe seasonal trends have affected and will
continue to affect our quarterly results, our growth may have overshadowed these effects to date. We believe that our business
will continue to be subject to seasonality in the future, which may result in fluctuations in our financial results.
Due to these and other factors, our financial results for any quarterly or annual period may not meet our expectations or the
expectations of investors or analysts that follow our stock and may not be meaningful indications of our future performance.
Our vertical integration may result in higher costs.
We manage all aspects of our business, including writing our medical plan, implementing our own national independent referral
network of Territory Partners, pricing our medical plan subscriptions with our in-house actuarial team, administering claims
made with respect to our medical plan, operating our own contact center and owning our own brand. While we believe this
vertically integrated approach reduces frictional costs and enhances our members’ experiences, third-party providers may, now
or in the future, be able to replicate this or a better model, partially or entirely, on a more efficient and effective basis. If our in-
house services are or become less efficient or less effective than the same services provided by a third party, we may not realize
the related cost savings and may be unable to provide a superior membership experience, which may have an adverse effect on
our operating results.
Our forecasts of market growth may prove to be inaccurate, and even if the market for medical coverage for cats and dogs
in North America achieves the forecasted growth, our business may not grow at similar rates, if at all.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates, which may not prove to be
accurate. Although we believe that the North American market for pet medical coverage will grow over time if consumers are
offered a high-value product, the market for medical coverage for cats and dogs in North America has been historically growing
slowly or stagnant and may not be capable of growing further. Even if this market experiences significant growth, we may not
grow our business at similar rates, or at all. For example, the market for medical coverage for cats and dogs in North America
has been highly competitive and may become even more competitive in the future. Our growth is subject to many factors,
including our success in implementing our business strategy and maintaining our position in a highly competitive market,
which are subject to many risks and uncertainties.
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We depend on key personnel to operate our business and, if we are unable to retain, attract and integrate qualified
personnel, our ability to develop and successfully grow our business could be harmed.
Our success depends to a significant extent on the continued services of our current management team, including Darryl
Rawlings, our founder and Chief Executive Officer. The loss of Mr. Rawlings or several other key executives or employees
within a short time frame could have a material adverse effect on our business. We employ all of our executive officers and key
employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without
notice, subject, in certain cases, to severance payment rights. In order to retain valuable employees, in addition to salary and
cash incentives, we have provided stock options and restricted stock that vest over time and may in the future grant equity
awards tied to company performance. The value to employees of stock options and restricted stock that vest over time will be
significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to
maintain their retention benefit or counteract offers from other companies. Additionally, if we were to lose a large percentage of
our current employees in a relatively short time period, or our employees were to engage in a work stoppage or unionize, we
may be unable to hire and train new employees quickly enough to prevent disruptions in our operations, which may result in
the loss of members, Territory Partners or referral sources.
Our success also depends on our ability to attract, retain and motivate additional skilled management personnel. We plan to
continue to expand our work force, which we believe will enhance our business and operating results. We believe that there is
significant competition for qualified personnel with the skills and knowledge that we require. Many of the other companies
with which we compete for qualified personnel have greater financial and other resources than we do. They also may provide
more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to
high-quality candidates than those we have to offer. If we are unable to attract and retain the necessary qualified personnel to
accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our
business objectives and our ability to pursue our business strategy. New hires require significant training and, in most cases,
take significant time before they achieve full productivity. New employees may not become as productive as we expect, and we
may be unable to hire or retain sufficient numbers of qualified individuals. If our recruiting, training and retention efforts are
not successful or do not generate a corresponding increase in revenue, our business will be harmed.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute
crucially to our business.
Our culture is fundamental to our success and defines who we are and how we operate our business. We were founded on a
deep appreciation of the special relationship between pet owners, their beloved pets and their trusted veterinarians. We have
invested substantial time, energy and resources in developing a culture that fosters teamwork, innovation, creativity and a focus
on providing value for our members as well as for Territory Partners and veterinarians. As we develop our infrastructure while
we grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture
could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and
teamwork and effectively focus on and pursue our corporate objectives.
We depend on relationships with strategic partners, and our inability to maintain our existing and secure new relationships
with strategic partners could harm our revenue and operating results.
A portion of our enrollment leads are attributable to a variety of different types of strategic partnership arrangements. These
partnerships involve various risks, depending on their structure, including the following:
• we may be unable to maintain or secure favorable relationships with strategic partners;
•
•
our strategic partners may not be successful in creating leads;
our strategic partners could terminate their relationships with us;
• we may not experience a consistent correlation between revenues and expenditures related to the partnership, and
•
bad publicity and other issues faced by our strategic partners could negatively impact us.
Our business and financial condition is subject to risks related to our writing of policies pursuant to contractual
relationships with unaffiliated third parties.
Our other business segment generally includes businesses revenues and expenses involving contractual relationships with
unaffiliated third parties and marketing to enterprises. We have relatively limited experience in writing policies for unaffiliated
third parties. This business is not expected to grow at the same rate as our core business and may decline. Changes to this
business may be volatile due to the nature of the relationships. Further, this business historically has had, and we expect it to
continue to have, lower margins than our core business. As a result of this line of business, we are subject to additional
regulatory requirements and scrutiny, which increase our costs, risks and may have an adverse effect on our operations. Further,
administration of this business and any similar business in the future may divert our time and attention away from our core
business, which could adversely affect our operating results in the aggregate.
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For example, we have written pet insurance policies for an unaffiliated general agent since 2012. These policies provide
different coverage and are subject to materially different terms and conditions than the Trupanion medical plan. Further, the
unaffiliated general agent administers these policies and markets them to consumers. For the year ended December 31, 2015,
premiums from these policies accounted for 6.7% of our total revenue. This relationship can be terminated by either party and,
if terminated, would result in a reduction in our revenue to the extent we cannot enter into another relationship and generate
equivalent revenues with a different general agent. In addition, the general agent controls a trust account it maintains on our
behalf. If the general agent makes operating decisions that adversely affect its business or brand, our business or brand could
also be adversely affected.
In Canada, our medical plan is written by Omega General Insurance Company (Omega). If Omega were to terminate its
underwriting arrangement with us, our business could be adversely affected.
In Canada, our medical plan is written by Omega, and we assume all premiums written by Omega and the related claims
through an agency agreement and a fronting and administration agreement. These agreements will remain in effect until
December 31, 2017 but may be terminated by either party with one year’s prior written notice. If Omega were to terminate our
agreement or be unable to write insurance for regulatory or other reasons, we may have to terminate subscriptions with our
existing members, or suspend member enrollment and renewals in Canada until we entered into a relationship with another
third party to write our medical plan, which may take a significant amount of time and require significant expense. We may not
be able to enter into a new relationship, and any new relationship would likely be on less favorable terms. Any delay in entry
into a new relationship or suspension of member enrollment and renewals could have a material adverse effect on our operating
results and financial condition.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may
lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may
be negatively affected.
We are required to maintain internal control over financial reporting and to report any material weaknesses in such internal
control. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires that we evaluate and determine the
effectiveness of our internal control over financial reporting and, beginning with this annual report for the fiscal year ended
December 31, 2015, provide a management report on the internal control over financial reporting, which must be attested to by
our independent registered public accounting firm when we no longer qualify for the exemption provided to an emerging
growth company, as defined by The Jumpstart Our Business Startups Act of 2012 (JOBS Act).
We may not detect errors on a timely basis and our financial statements may be materially misstated. We have had in the past,
and may have in the future, material weaknesses and significant deficiencies in our internal control over financial reporting. If
we or our independent registered public accounting firm identify future material weaknesses in our internal control over
financial reporting, are unable to comply with the requirements of Section 404 in a timely manner, are unable to assert that our
internal control over financial reporting is effective or our independent registered public accounting firm is unable to express an
opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy
and completeness of our financial reports and the market price of our common stock could be negatively affected. We could
also become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory
authorities, which could require additional financial and management resources.
If our security measures are breached and unauthorized access is obtained to our data, including our members’ data, we
may lose our competitive advantage, our systems may be perceived as not being secure and we may incur third-party
liability.
Our data repository contains proprietary information that we believe gives us a competitive advantage, including claims data
and other data with respect to members, Territory Partners, veterinarians and other third parties. Security breaches could expose
us to a risk of loss of our data and/or disclosure of this data, either publicly or to a third party who could use the information to
gain a competitive advantage. In the event of a loss of our systems or data, we could experience increased costs or delays,
which in turn may harm our financial condition, damage our brand and result in the loss of members. Such a disclosure also
could lead to litigation and possible liability.
In the course of operating our business, we may store and/or transmit our members’ confidential information, including credit
card and bank account numbers, pet medical records and other private information. Security breaches could expose us to a risk
of loss of this information, litigation and possible liability. Our payment services may be susceptible to credit card and other
payment fraud schemes, including unauthorized use of credit cards, debit cards or bank account information, identity theft or
merchant fraud.
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If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a
result, someone obtains unauthorized access to our data, including data of our members, our reputation may be damaged, our
business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to
sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to
anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security
occurs, the public perception of the effectiveness of our security measures could be harmed and we could lose members, which
would adversely affect our business.
Any legal liability, regulatory penalties or negative publicity we encounter, including based on the information on our
website or that we otherwise distribute or provide, directly or through Territory Partners or other referral sources, could
harm our business, operating results and financial condition.
Any legal disputes or regulatory penalties involving us may be publicly announced, which could materially harm our reputation
and adversely affect our business. We also provide information on our website, through our contact center and in other ways
regarding pet health, the pet insurance industry in general and our medical plan, including information relating to subscription
fees, coverage, benefits, exclusions, limitations, availability and medical plan comparisons. A significant amount of both
automated and manual effort is required to maintain the medical plan information on our website. Separately, from time to time,
we use the information provided on our website and otherwise collected by us to publish reports designed to educate
consumers. For example, we produce a significant amount of marketing materials regarding our medical plan. If the
information we provide on our website, through our contact centers or otherwise is not accurate or is construed as misleading,
or if we improperly assist individuals in purchasing subscriptions to our medical plan, our members, competitors or others
could attempt to hold us liable for damages, our relationships with veterinarians and other referral sources could be terminated
and regulators could attempt to subject us to penalties, revoke our licenses to transact business in one or more jurisdictions or
compromise the status of our licenses to transact our business in other jurisdictions, which could result in our loss of revenue.
In the ordinary course of operating our business, we may receive complaints that the information we provided was not accurate
or was misleading. These types of claims could be time-consuming and expensive to defend, could divert our management’s
attention and other resources and could cause a loss of confidence in our business. As a result, whether or not we are able to
successfully resolve these claims, they could harm our business, operating results and financial condition.
We are subject to a number of risks related to accepting automatic fund transfers and credit card and debit card payments.
We accept payments of subscription fees from our members through automatic fund transfers and credit and debit card
transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase
in the number of members who utilize credit and debit cards to pay their subscription fees or related credit and debit card fees
would reduce our margins and could require us to increase the subscription fees for our medical plan, which could cause us to
lose members and revenue, or suffer an increase in our operating expenses, either of which could adversely affect our operating
results.
If we, or any of our processing vendors or banks have problems with our billing software, or if the billing software
malfunctions, it could have an adverse effect on our member satisfaction and could cause one or more of the major credit card
companies or banks to disallow our continued use of their payment products. In addition, if our billing software fails to work
properly and, as a result, we do not automatically charge our members’ credit cards on a timely basis or at all, or a bank
withdraws the incorrect amount or fails to timely transfer the correct amount to us, we could lose revenue and harm our
member experience, which could adversely affect our business and operating results.
We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds
transfers, including the Payment Card Industry Data Security Standard (PCI DSS), a security standard applicable to companies
that collect, store or transmit certain data regarding credit and debit cards, holders and transactions. In the past we may not have
been, we currently are not and in the future we may not be, fully or materially compliant with PCI DSS. Our failure to comply
fully or materially with the PCI DSS now or at any point in the future may violate payment card association operating rules,
federal and state laws and regulations, and the terms of our contracts with payment processors and merchant banks. Such
failure to comply fully or materially also may subject us to fines, penalties, damages and civil liability, and may result in the
loss of our ability to accept credit and debit card payments. In addition, there is no guarantee that PCI DSS compliance, if we
are able to become compliant, will prevent illegal or improper use of our payment systems or the theft, loss or misuse of data
pertaining to credit and debit cards, credit and debit card holders and credit and debit card transactions.
If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of
our security measures and significantly higher credit card-related costs, each of which could adversely affect our business,
operating results and financial condition.
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If we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or our
fees for many or all categories of credit and debit card transactions, credit card companies and debit card issuers may increase
our fees or terminate their relationship with us. Any increases in our credit card and debit card fees could adversely affect our
operating results, particularly if we elect not to raise our subscription fees. The termination of our ability to process payments
on any major credit or debit card would significantly impair our ability to operate our business.
Failure to adequately protect our intellectual property could substantially harm our business and operating results.
We rely on a combination of intellectual property rights, including trade secrets, copyrights, trademarks and domain names, as
well as contractual restrictions, to establish and protect our intellectual property. As of December 31, 2015, we had three
pending patent applications in the United States, one pending patent application in Canada, one pending patent application in
Brazil, one pending patent application in Japan, one pending patent application in China, one international patent published
under the Patent Cooperation Treaty, and one pending patent application and one issued patent in Europe. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy our digital content, pricing analytics, technology,
software, branding and functionality, or obtain and use information that we consider proprietary. Moreover, policing our
proprietary rights is difficult and may not always be effective. If we continue to expand internationally, we may need to enforce
our rights under the laws of countries that do not protect proprietary rights to as great an extent as do the laws of the United
States, which may be expensive and divert management’s attention away from other operations.
Our digital content is not protected by any registered copyrights or other registered intellectual property. Rather, our digital
content is protected by statutory and common law rights, user agreements that limit access to and use of our data and by
technological measures. Compliance with use restrictions is difficult to monitor, and our proprietary rights in our digital content
databases may be more difficult to enforce than other forms of intellectual property rights.
As of December 31, 2015, we had five registered trademarks in the United States, including “Trupanion,” and five additional
trademark applications. We had one registered trademark in Canada, and two additional trademark applications. Many of our
unregistered trademarks, however, contain words or terms having a common usage and, as a result, may not be protectable
under applicable law. Trademark protection may also not be available, or sought by us, in every country in which our medical
plan may become available. Competitors may adopt names similar to ours, or purchase our trademarks and confusingly similar
terms as keywords in Internet search engine advertising programs, thereby impeding our ability to build brand identity and
possibly confusing members. Moreover, there could be potential trade name or trademark infringement claims brought by
owners of other registered trademarks or trademarks that incorporate marks similar to our trademarks.
We may take action, including initiating litigation, to protect our intellectual property rights and the integrity of our brand, and
these efforts may prove costly, ineffective and increase the likelihood of counterclaims against us.
We currently hold the “Trupanion.com” Internet domain name and numerous other related domain names. Domain names
generally are regulated by Internet regulatory bodies. If we lose the ability to use a domain name in the United States, Canada
or any other country, we may be forced to acquire domain names at significant cost or, in the alternative, be forced to incur
significant additional expenses to market our medical plan, including the development of a new brand and the creation of new
promotional materials, which could substantially harm our business and operating results. The regulation of domain names in
the United States, Canada and in other foreign countries is subject to change. Regulatory bodies could establish additional top-
level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result,
we may not be able to acquire or maintain the domain names that utilize the “Trupanion” name in all of the countries in which
we currently intend to conduct business.
We seek to control access to our proprietary technology, software and documentation by entering into confidentiality and
invention assignment agreements with our employees and contractors, confidentiality agreements with third parties, such as
service providers, vendors, individuals and entities that may be exploring a business relationship with us, and terms of use with
third parties, such as veterinary hospitals desiring to use our technology, software and documentation. These agreements may
not prevent disclosure of intellectual property, trade secrets and/or other confidential information, and may not provide an
adequate remedy in the event of misappropriation of trade secrets or any unauthorized disclosure of trade secrets and other
confidential information. In addition, others may independently discover trade secrets and confidential information and, in such
cases, we may not be able to assert any trade secret rights against such parties. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of our intellectual property rights and related confidentiality and nondisclosure
provisions, and failure to obtain or maintain trade secret protection, or our competitors being able to obtain our trade secrets or
to independently develop technology similar to ours or competing technologies, could adversely affect our competitive business
position.
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Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative
bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights, to protect our
domain names and to determine the validity and scope of the proprietary rights of others. Our efforts to enforce or protect our
proprietary rights may be ineffective, could result in substantial costs and diversion of resources and could substantially harm
our operating results.
Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in
significant costs and substantially harm our business and operating results.
Third parties have in the past and may in the future claim that our services infringe or otherwise violate their intellectual
property rights. We may be subject to legal proceedings and claims, including claims of alleged infringement by us of the
intellectual property rights of third parties. Any dispute or litigation regarding intellectual property could be expensive and time
consuming, regardless of the merits of any claim, and could divert our management and key personnel from our operations.
If we were to discover or be notified that our services potentially infringe or otherwise violate the intellectual property rights of
others, we may need to obtain licenses from these parties in order to avoid infringement. We may not be able to obtain the
necessary licenses on acceptable terms, or at all, and any such license may substantially restrict our use of the intellectual
property. Moreover, if we are sued for infringement and lose the lawsuit, we could be required to pay substantial damages or be
enjoined from offering the infringing services. Any of the foregoing could cause us to incur significant costs and prevent us
from selling or properly administering subscriptions to our medical plan or performing under our other contractual
relationships.
We rely on third parties to provide intellectual property and technology necessary for the operation of our business.
We utilize intellectual property and technology owned by third parties in developing and operating our technology platform and
operating our business. From time to time, we may be required to renegotiate with these third parties or negotiate with other
third parties to include or continue using their intellectual property or technology in our existing technology platform or
business operations or in modifications or enhancements to our technology platform or business operations. We may not be able
to obtain the necessary rights from these third parties on commercially reasonable terms, or at all, and the third-party
intellectual property and technology we use or desire to use may not be appropriately supported, maintained or enhanced by the
third parties. If we are unable to obtain the rights necessary to use or continue to use third-party intellectual property and
technology in our operations, or if those third parties are unable to support, maintain and enhance their intellectual property and
technology, we could experience increased costs or delays, which in turn may harm our financial condition, damage our brand
and result in the loss of members.
Our technology platform and our data are also hosted by a third-party service provider. The terms under which such third-party
service provider provides us services may change and we may be required to renegotiate with that third party. If we are unable
to renegotiate satisfactory terms, we may not be able to transition to an alternative service provider without interrupting the
availability of our technology platform and any interruption could materially and adversely affect our business. Additionally, if
our third-party service provider experiences any disruptions, outages or catastrophes, or if it ceases to conduct business for any
reason, we could experience an interruption in our business, which in turn may damage our brand, result in a loss of members
and harm our financial condition.
The outcome of litigation or regulatory proceedings could subject us to significant monetary damages, restrict our ability to
conduct our business, harm our reputation and otherwise negatively impact our business.
From time to time, we have been, and in the future may become, subject to litigation, claims and regulatory proceedings and
inquiries, including market conduct examinations and other investigations by state insurance regulatory agencies. For example,
we are currently addressing examination findings from the Washington State Office of Insurance Commissioner.
We cannot predict the outcome of these or any future actions or proceedings, and the cost of defending such actions or
proceedings could be material. Further, defending such actions or proceedings could divert our management and key personnel
from our business operations. If we are found liable in any action or proceeding, we may have to pay substantial damages or
fines, or change the way we conduct our business, either of which may have a material adverse effect on our business,
operating results, financial condition and prospects. There may also be negative publicity associated with litigation or
regulatory proceedings that could harm our reputation or decrease acceptance of our services. These claims may be costly to
defend and may result in assessment of damages, adverse tax consequences and harm to our reputation.
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We do not believe the nature of any pending regulatory or legal proceeding will have a material adverse effect on our business,
operating results and financial condition. Our assessment, however, may be incorrect, and is subject to change at any time
based on the discovery of facts or circumstances that are not presently known to us. Therefore, it is possible that pending or
future litigation may have a material adverse effect on our business, reputation, operating results and financial condition.
Covenants in the credit agreement governing our revolving line of credit may restrict our operations, and if we do not
effectively manage our business to comply with these covenants, our financial condition could be adversely affected.
The credit agreement governing our revolving line of credit contains various restrictive covenants, including restrictions on our
ability to dispose of our assets, change the name, location, office or executive management of our business, merge with or
acquire other entities, incur other indebtedness, incur encumbrances, pay dividends or make distributions to holders of our
capital stock, make investments, engage in transactions with our affiliates, make payments on subordinated debt, store
equipment and inventory with a third party, become an investment company, permit withdrawals from APIC (with certain
exceptions), conduct operations in certain of our Canadian subsidiaries and amend our certificate of incorporation in a manner
adverse to the lenders. Our credit agreement also contains financial covenants, including those that require APIC to maintain
certain capital and surplus, require us to maintain certain minimum cash balances and require us to achieve specified monthly
revenue, claims ratios and EBITDA levels (each as defined in the credit agreement). Our ability to meet these restrictive
covenants can be affected by events beyond our control, and we have been in the past, and may be in the future, unable to do
so. In addition, our failure to maintain effective internal controls to measure compliance with our financial covenants could
affect our ability to take corrective actions on a timely basis and could result in our being in breach of these covenants. Our
credit agreement provides that our breach or failure to satisfy certain covenants constitutes an event of default. Upon the
occurrence of an event of default, our lenders could elect to declare any future amounts outstanding under our credit agreement
to be immediately due and payable. If we are unable to repay those amounts, our financial condition could be adversely
affected.
Any indebtedness we incur could adversely affect our business and limit our ability to expand our business or respond to
changes, and we may be unable to generate sufficient cash flow to satisfy any of our debt service obligations.
As of December 31, 2015, we had no outstanding indebtedness. We may incur indebtedness in the future, including any
additional borrowings available under our revolving line of credit. Any substantial indebtedness and the fact that a substantial
portion of our cash flow from operating activities could be needed to make payments on this indebtedness could have adverse
consequences, including the following:
•
•
•
•
reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities and
other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate,
which could place us at a competitive disadvantage compared to our competitors that may have less debt;
limiting our ability to borrow additional funds; and
increasing our vulnerability to general adverse economic and industry conditions.
Our ability to borrow any funds needed to operate and expand our business will depend in part on our ability to generate cash.
Our ability to generate cash is subject to the performance of our business, as well as general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We may also need to borrow additional funds to support
risk-based capital requirements related to growth. If our business does not generate sufficient cash flow from operating
activities or if future borrowings are not available to us, under our revolving credit facility or otherwise, in amounts sufficient
to enable us to fund our liquidity needs, our operating results, financial condition and ability to expand our business and meet
our risk-based capital requirements may be adversely affected.
Our financial results may be negatively affected if we are required to pay income tax, premium tax, transaction tax or other
taxes in jurisdictions where we are currently not collecting and reporting tax.
We currently pay income tax, premium tax, transaction tax and other taxes in certain jurisdictions in which we do business. A
successful assertion by one or more jurisdictions that we should be paying income, premium, transaction or other taxes on our
income or in connection with enrollment in our medical plan or intercompany services, or the enactment of new laws requiring
the payment of income, premium, transfer or other taxes in connection with our business operations, including enrollment in
our medical plan or intercompany services, could result in substantial tax liabilities. Our voluntary disclosure of tax obligations
and any future assertions by any jurisdiction that we should be paying taxes may create increased administrative burdens or
costs, require payment of substantial fines and penalties, discourage consumers from enrolling in our medical plan, reduce our
operational efficiencies, decrease our ability to compete or otherwise substantially harm our business and operating results.
If consumer acceptance of the Internet as an acceptable marketplace for a pet medical plan does not continue to increase,
our growth prospects will be harmed.
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Our success depends in part on widespread consumer acceptance of the Internet as a marketplace for the purchase of a pet
medical plan. Internet use may not continue to develop at historical rates, and consumers may not continue to use the Internet to
research, select and purchase a pet medical plan. In addition, the Internet may not be accepted as a viable resource for a number
of reasons, including lack of security of information or privacy protection, possible disruptions, computer viruses or other
damage to Internet servers or to users’ computers, and excessive governmental regulation.
Our success will depend, in large part, on third parties maintaining the Internet infrastructure to provide a reliable network
backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services.
We depend in part on Internet search engines to attract potential new members to visit our website. If Internet search
engines’ methodologies are modified or our search result page rankings decline for other reasons, our new member growth
could decline, and our business and operating results could be harmed.
We derive a significant amount of traffic to our website from consumers who search for pet medical insurance through Internet
search engines, such as Google, Bing and Yahoo!. A critical factor in attracting consumers searching for pet medical insurance
on the Internet to our website is whether we are prominently displayed in response to an Internet search relating to pet
insurance. Algorithmic search result listings are determined and displayed in accordance with a set of formulas or algorithms
developed by the particular Internet search engine, which may change from time to time. If we are listed less prominently in, or
removed altogether from, search result listings for any reason, the traffic to our websites would decline and we may not be able
to replace this traffic, which in turn would harm our business, operating results and financial condition. If we decide to attempt
to replace this traffic, we may be required to increase our sales and marketing expenditures, including by utilizing paid search
advertising, which would also increase our pet acquisition costs and harm our business, operating results and financial
condition.
Changes in the economy may negatively impact our business, operating results and financial condition.
Our business may be affected by changes in the economic environment. Pet medical plans are a discretionary purchase, and
members may reduce or eliminate their discretionary spending during an economic downturn, resulting in an increase in
medical plan subscription terminations and a reduction in the number of new member enrollments. We may experience a
material increase in medical plan subscription terminations or a material reduction in our member retention rate in the future,
especially in the event of a prolonged recessionary period or a downturn in economic conditions. Conversely, consumers may
have more income to pay veterinary costs out-of-pocket and less desire to purchase a pet medical plan during a period of
economic growth. In addition, media prices may increase during a period of economic growth, which could increase our sales
and marketing expenses. As a result, our business, operating results and financial condition may be significantly affected by
changes in the economic environment.
We may acquire other companies or technologies, which could divert our management’s attention, result in additional
dilution to our stockholders and otherwise disrupt our operations and harm our operating results.
We may decide to acquire businesses, products and technologies. Our ability to successfully make and integrate acquisitions is
unproven. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses
in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. Further, even if we
successfully acquire additional businesses or technologies, we may not be able to migrate the policyholders to our medical
plan, integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business
following the acquisition. We also may not achieve the anticipated benefits from the acquired business or technology. In
addition, we may unknowingly inherit liabilities from future acquisitions that arise after the acquisition and are not adequately
covered by indemnities. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which
could adversely affect our operating results. If an acquired business or technology fails to meet our expectations, our business,
operating results and financial condition may suffer.
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Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2015, we had U.S. federal net operating loss carryforwards of approximately $63.5 million that will begin
to expire in 2027. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes
an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change
tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership
change” generally occurs if there is a cumulative change in our ownership by “5-percent stockholders” that exceeds 50
percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We may have experienced an
ownership change in the past and we may experience an ownership change in the future, some of which may be outside our
control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, or other
pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to limitations.
We may explore opportunities to expand our operations globally, and we may therefore become subject to a number of risks
associated with international expansion and operations.
As part of our growth plan, we expect to explore opportunities to expand our operations globally. We have no history of
marketing, selling, administrating and supporting our medical plan to consumers outside of the United States, Canada and
Puerto Rico. International sales and operations are subject to a number of risks, including the following:
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regulatory rules and practices, foreign exchange controls, tariffs, tax laws and treaties that are different than those we
operate under in the United States, Canada and Puerto Rico and that carry a greater risk of unexpected changes;
the costs and resources required to modify our technology and sell our medical plan in non-English speaking
countries;
the costs and resources required to modify our medical plan appropriately to suit the needs and expectations of
residents and veterinarians in such foreign countries;
our data analytics platform may have limited applicability in foreign countries, which may impact our ability to
develop adequate underwriting criteria and accurately price subscriptions to our medical plan in such countries;
increased expenses incurred in establishing and maintaining office space and equipment for our international
operations;
technological incompatibility;
fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;
difficulties in attracting and retaining personnel with experience in international operations;
difficulties in modifying our business model in a manner suitable for any particular foreign country, including any
modifications to our Territory Partner model to the extent we determine that our existing model is not suitable for use
in foreign countries;
our lack of experience in marketing to consumers and veterinarians, and encouraging online marketing, in foreign
countries;
our relative lack of industry connections in many foreign countries;
difficulties in managing operations due to language barriers, distance and time zone differences, staffing, cultural
differences and business infrastructure constraints, including difficulty in obtaining foreign and domestic visas;
application of foreign laws and regulations to us, including more stringent or materially different insurance,
employment, consumer and data protection laws;
the uncertainty of protection for intellectual property rights in some countries;
greater risk of a failure of foreign employees to comply with applicable U.S. and foreign laws, including antitrust
regulations, the U.S. Foreign Corrupt Practices Act and any trade regulations ensuring fair trade practices; and
general economic and political conditions in these foreign markets.
These factors and other factors could harm our ability to gain future international revenue and, consequently, materially impact
our business and operating results. The expansion of our existing international operations and entry into additional international
markets will require significant management attention and financial resources, detracting from management attention and
financial resources otherwise available to our existing business. Our failure to successfully manage our international operations
and the associated risks effectively could limit the future growth of our business and could have an adverse effect on our
operating results and financial condition.
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A downgrade in the financial strength rating of our insurance company may have an adverse effect on our competitive
position, the marketability of our medical plan, and/or on our liquidity, access to and cost of borrowing, operating results
and financial condition.
Although we do not believe that the financial strength rating of APIC is material for customers or to understand our business
beyond what is already publicly available, financial strength ratings can be important factors in establishing the competitive
position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating
agencies review the financial performance and condition of APIC and could downgrade or change the outlook on its ratings due
to, for example, a change in its statutory capital, a change in the rating agency’s determination of the amount of risk-based
capital required to maintain a particular rating or a reduced confidence in management or its business strategy, as well as a
number of other considerations that may or may not be under our control. The insurance financial strength rating of APIC is
subject to quarterly review, and APIC may not retain the current rating. A downgrade in this or any future ratings could have a
material effect on our sales, our competitiveness, the marketability of our medical plan, our liquidity, access to and cost of
borrowing, operating results and financial condition.
Our business is subject to the risks of earthquakes, floods, fires and other natural catastrophic events and to interruption by
man-made problems such as computer viruses or terrorism.
Our systems and operations are vulnerable to damage or interruption from earthquakes, human error, intentional bad acts,
hurricanes, floods, fires, power losses, telecommunications failures, hardware and system failures, terrorist attacks, acts of war,
break-ins or similar events. For example, our corporate headquarters and facilities are located in Seattle, Washington near
known earthquake fault zones and are vulnerable to significant damage from earthquakes. In addition, acts of terrorism could
cause disruptions in our business or the economy as a whole. Our servers and systems may also be vulnerable to computer
viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to
interruptions, delays, loss of critical data or the unauthorized disclosure of confidential member data. We currently have limited
disaster recovery capability, and our business interruption insurance may be insufficient to compensate us for losses that may
occur. Such disruptions could negatively impact our ability to run our business, which could have an adverse effect on our
operating results and financial condition.
Risks Related to Compliance with Laws and Regulations
We may not maintain the amount of risk-based capital required to avoid additional regulatory oversight, which may
adversely affect our ability to operate our business.
Memberships in our U.S. medical plan are written by APIC. APIC is an insurance company domiciled in the state of New York
and licensed by the New York Department of Financial Services. Regulators in the states in which we do business impose risk-
based capital requirements on APIC that generally are approved by the National Association of Insurance Commissioners to
ensure APIC maintains reasonably appropriate levels of surplus to support our operations and to protect our members against
adverse developments in APIC’s financial circumstances, taking into account the risk characteristics of our assets, liabilities
and certain other items. Generally, the NY DFS will compare, on an annual basis as of December 31 or more often as deemed
necessary, an insurer’s total adjusted capital and surplus against what is referred to as an “Authorized Control Level” of risk-
based capital that is calculated based on a formula designed to estimate an insurer’s capital adequacy. There generally are five
outcomes possible from this comparison, depending on the insurer’s level of risk-based capital as compared to the applicable
Authorized Control Level.
• No Action Level: Insurer’s total adjusted capital is equal to or greater than 200% of the Authorized Control Level.
• Company Action Level: Insurer’s total adjusted capital is less than 200% but greater than 150% of the Authorized
Control Level. When at this level, an insurer must prepare and submit a financial plan to the NY DFS for review and
approval. Generally, a risk-based capital plan would identify the conditions that contributed to the Company Action
Level and include the insurer’s proposed plans for increasing its risk-based capital in order to satisfy the No Action
Level. The failure to provide the NY DFS with a risk-based capital plan on a timely basis or the inability of the NY
DFS and the insurer to mutually agree on an appropriate risk-based capital plan could trigger a Regulatory Action
Level outcome, subject to the insurer’s right to a hearing on the issue.
• Regulatory Action Level: Insurer’s total adjusted capital is less than 150% but greater than 100% of the Authorized
Control Level. When at this level, an insurer generally must provide a risk-based capital plan to the NY DFS and be
subject to examination or analysis by the NY DFS to the extent it deems necessary, including such corrective actions
as the NY DFS may require.
• Authorized Control Level: Insurer’s total adjusted capital is less than 100% but greater than 70% of the Authorized
Control Level. At this level, the NY DFS generally could take remedial actions that it determines necessary to protect
the insurer’s assets, including placing the insurer under regulatory control.
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• Mandatory Control Level: Insurer’s total adjusted capital is less than 70% of the Authorized Control Level. At this
level, the NY DFS generally is required to take steps to place the insurer under regulatory control, even if the insurer is
still solvent.
As of December 31, 2015, APIC was required to maintain at least $24.5 million of risk-based capital to satisfy the No Action
Level (the highest of the above levels). As of December 31, 2015, APIC maintained $26.1 million of risk-based capital. The NY
DFS may increase the required levels of risk-based capital in the future, and we anticipate that we will need to maintain greater
amounts of risk-based capital if our pet enrollment continues to grow.
Additionally, if our risk-based capital falls below the Company Action Level, we may be in breach of various contractual
relationships, including, for example, with the unaffiliated general agent for which we write pet insurance policies, which may
give such parties the ability to cancel their contracts with us and/or sue us for damages related to our risk-based capital levels,
which could have a material adverse effect on our financial condition.
We may require additional capital to meet our risk-based capital requirements, pursue our business objectives and respond
to business opportunities, challenges or unforeseen circumstances. If capital is not available to us at any time, our business,
operating results and financial condition may be harmed.
We may require additional capital to meet our risk-based capital requirements, operate or expand our business or respond to
unforeseen circumstances. Additional funds may not be available when we need them, on terms that are acceptable to us, or at
all. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of
our common stock could be significantly diluted and these newly issued securities may have rights, preferences or privileges
senior to those of holders of our common stock. Further, volatility in the credit or equity markets may have an adverse effect on
our ability to obtain debt or equity financing or the cost of such financing. Similarly, our access to funds may be impaired if
regulatory authorities or rating agencies take negative actions against us. If a combination of these factors were to occur, our
internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional
financing on favorable terms. If funds are unavailable to us on reasonable terms when we need them, we may be unable to meet
our risk-based capital requirements, train and support our employees, support Territory Partners, maintain the competitiveness
of our technology, pursue business opportunities, service our existing debt, pay claims or acquire new members, any of which
could have an adverse effect on our business, operating results and financial condition.
If we fail to comply with the numerous laws and regulations that are applicable to the sale of a pet medical plan, our
business and operating results could be harmed.
The sale of a pet medical plan, which is considered a type of property and casualty insurance in most jurisdictions, is heavily
regulated by each state in the United States, in the District of Columbia, in Puerto Rico and by Canadian federal, provincial and
territorial governments. In the United States, state insurance regulators are charged with protecting policyholders and have
broad regulatory, supervisory and administrative powers over our business practices. Because we do business in all 50 states,
the District of Columbia, all Canadian provinces and territories and Puerto Rico, compliance with insurance-related laws, rules
and regulations is difficult and imposes significant costs on our business. Each jurisdiction’s insurance department typically has
the power, among other things, to:
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conduct inquiries into the insurance-related activities and conduct of agents and agencies and others in the sales,
marketing and promotional channels;
require and regulate disclosure in connection with the sale and solicitation of insurance policies;
authorize how, by which personnel and under what circumstances insurance premiums can be quoted and published
and an insurance policy sold;
approve which entities can be paid commissions from carriers and the circumstances under which they may be paid;
regulate the content of insurance-related advertisements, including web pages, and other marketing practices;
approve policy forms, require specific benefits and benefit levels and regulate premium rates;
impose fines and other penalties; and
impose continuing education requirements.
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While the U.S. federal government does not directly regulate the insurance industry, federal legislation and administrative
policies can also affect us. Congress and various federal agencies periodically discuss proposals that would provide for federal
oversight of insurance companies. We cannot predict whether any such laws will be enacted or the effect that such laws would
have on our business. We also do business in all ten provinces and three territories of Canada. The provincial and territorial
insurance regulators have the power to regulate the market conduct of insurers and insurance intermediaries, and the licensing
and supervision of insurance agents, brokers, and adjusters, along with enforcement rights, including the right to assess
administrative monetary penalties in certain provinces.
Insurance companies are also regulated at the federal level in Canada, and the Insurance Companies Act prohibits a foreign
entity from insuring risks in Canada unless it is authorized by an Order made by the Superintendent of Financial Institutions
(Canada) permitting it to do so.
Due to the complexity, periodic modification and differing interpretations of insurance laws and regulations, we have not
always been, and we may not always be, in compliance with them. New insurance laws, regulations and guidelines also may
not be compatible with the manner in which we market and sell subscriptions to our medical plan in all of our jurisdictions and
member acquisition channels, including over the Internet. Failure to comply with insurance laws, regulations and guidelines or
other laws and regulations applicable to our business could result in significant liability, additional department of insurance
licensing requirements, the revocation of licenses in a particular jurisdiction or our inability to sell subscriptions to our medical
plan, which could significantly increase our operating expenses, result in the loss of our revenue and otherwise harm our
business, operating results and financial condition.
Moreover, an adverse regulatory action in one jurisdiction could result in penalties and adversely affect our license status or
reputation in other jurisdictions, including due to the current requirement that adverse regulatory actions in one jurisdiction be
reported to other jurisdictions. Even if the allegations in any regulatory or other action against us ultimately are determined to
be unfounded, we could incur significant time and expense defending against the allegations, and any related negative publicity
could harm consumer and third-party confidence in us, which could significantly damage our brand.
In addition, we have received, and may in the future receive, inquiries from regulators regarding our marketing and business
practices. These inquires may include investigations regarding a number of our business practices, including the manner in
which we market and sell subscriptions to our medical plan and the manner in which we write policies for any unaffiliated
general agent. Any modification of our marketing or business practices in response to regulatory inquiries could harm our
business, operating results or financial condition.
A regulatory environment that limits rate increases may adversely affect our operating results and financial condition.
Many states, including New York, have adopted laws or are considering proposed legislation that, among other things, limit the
ability of insurance companies to effect rate increases or to cancel, reduce or not renew insurance coverage with respect to
existing policies, and many state regulators have the power to reduce, or to disallow increases in premium rates. Most states,
including New York, require licensure and regulatory approval prior to marketing new insurance products. Our practice has
been to regularly reevaluate the price of our medical plan subscriptions, with any pricing changes implemented at least
annually, subject to the review and approval of the state regulators, who may reduce or disallow our pricing changes. Such
review has often in the past resulted, and may in the future result, in delayed implementation of pricing changes and prevent us
from making changes we believe are necessary to achieve our targeted claims payout ratio, which could adversely affect our
operating results and financial condition. In addition, we may be prevented by regulators from limiting significant pricing
changes, requiring us to raise rates more quickly than we otherwise may desire. This could damage our reputation with our
members and reduce our retention rates, which could significantly damage our brand, result in the loss of expected revenue and
otherwise harm our business, operating results and financial condition.
In addition to regulating rates, certain states have enacted laws that require a property-casualty insurer, which includes a pet
insurance company, conducting business in that state to participate in assigned risk plans, reinsurance facilities, joint
underwriting associations (JUAs), Fair Access to Insurance Requirements (FAIR) plans and wind pools. In these markets, if the
state reinsurance facilities, wind pools, FAIR plans or JUAs recognize a financial deficit, they may in turn have the ability to
assess participating insurers, adversely affecting our operating results and financial condition if we are a part of such state
reinsurance facilities, wind pools, FAIR plans or JUAs. Additionally, certain states require insurers to participate in guaranty
funds for impaired or insolvent insurance companies. These funds periodically assess losses against all insurance companies
doing business in the state. Our operating results and financial condition could be adversely affected by any of these factors.
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Regulations that require individuals or entities that sell pet insurance to be licensed may be interpreted to apply to our
business, which could require us to modify our business practices.
Insurance regulators generally require that each individual who transacts pet insurance business on our behalf must maintain a
valid license in one or more jurisdictions. These requirements are subject to a variety of interpretations between jurisdictions.
We may not interpret and apply the requirements in the same manner as all applicable regulators, and, even if we have, the
requirements or regulatory interpretations of those requirements may change. Regulators have in the past and may in the future
determine that any of our personnel or referral sources were selling subscriptions to our medical plan on our behalf and needed
to be licensed in a particular jurisdiction. If such persons were not in fact licensed in any such jurisdiction, we could become
subject to conviction for an offense or the imposition of an administrative penalty and liable for significant penalties and would
likely be required to modify our business practices and sales and marketing programs, or license the affected individuals, which
may be impractical or costly and time-consuming to implement. Any modification of our business or marketing practices in
response to regulatory licensing requirements could harm our business, operating results or financial condition.
Most insurance legislation requires entities that solicit the sale of pet insurance to be validly licensed in the applicable
jurisdiction. If an insurance regulator were to determine that any entity soliciting the sale of a medical plan on our behalf did
not hold the required license, we may have to modify our business practices or marketing efforts, or license the affected
entities, which may be costly and time-consuming to implement.
We are subject to numerous laws and regulations, and compliance with one law or regulation may result in non-compliance
with another.
We are subject to numerous laws and regulations that are administered and enforced by a number of different governmental
authorities, each of which exercises a degree of interpretive latitude, including, in the United States, state insurance regulators,
state securities administrators, state attorneys general and federal agencies including the SEC and the U.S. Department of
Justice. Consequently, we are subject to the risk that compliance with any particular regulator’s or enforcement authority’s
interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when
compliance is judged in hindsight. In addition, there is risk that any particular regulator’s or enforcement authority’s
interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal environment may,
even absent any particular regulator’s or enforcement authority’s interpretation of a legal issue changing, cause us to change
our views regarding the actions we need to take from a legal risk management perspective, thus necessitating changes to our
practices that may, in some cases, increase our costs and limit our ability to grow or to improve the profitability of our business.
Further, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency
rather than a range of constituencies. For example, state insurance laws and regulations generally are intended to protect or
benefit purchasers or users of insurance products, not holders of securities, which generally is the jurisdiction of the SEC. In
many respects, these laws and regulations limit our ability to grow or to improve the profitability of our business.
Regulation of the sale of medical insurance for cats and dogs is subject to change, and future regulations could harm our
business and operating results.
The laws and regulations governing the offer, sale and purchase of medical insurance for cats and dogs are subject to change,
and future changes may be adverse to our business. For example, if a jurisdiction were to increase our risk-based capital
requirements or alter the requirements for obtaining or maintaining an agent’s license in connection with the enrollment of a
member in our medical plan, it could have a material adverse effect on our operations. Some states in the United States have
adopted, and others are expected to adopt, new laws and regulations related to the insurance industry. It is difficult to predict
how these or any other new laws and regulations will impact our business, but, in some cases, changes in insurance laws,
regulations and guidelines may be incompatible with various aspects of our business and require that we make significant
modifications to our existing technology or practices, which may be costly and time-consuming to implement and could also
harm our business, operating results and financial condition.
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Failure to comply with federal, state and provincial laws and regulations relating to privacy and security of personal
information, and civil liabilities relating to breaches of privacy and security of personal information, could create liabilities
for us, damage our reputation and harm our business.
A variety of U.S. and Canadian federal, state and provincial laws and regulations govern the collection, use, retention, sharing
and security of personal information. We collect and utilize demographic, credit and other private information from and about
our members when they visit our website, call our contact center and apply for enrollment in our medical plan. Further, we use
tracking technologies, including “cookies,” to help us manage and track our members’ interactions and deliver relevant advice
and advertising. Claims or allegations that we have violated applicable laws or regulations related to privacy and data security
could in the future result in negative publicity and a loss of confidence in us by our members and our participating service
providers, and may subject us to fines by credit card companies and the loss of our ability to accept credit and debit card
payments. In addition, we have posted privacy policies and practices concerning the collection, use and disclosure of member
data on our website. Several Internet companies have incurred penalties for failing to abide by the representations made in their
privacy policies and practices. In addition, our use and retention of personal information could lead to civil liability exposure in
the event of any disclosure of such information due to hacking, viruses, inadvertent action or other use or disclosure. Several
companies have been subject to civil actions, including class actions, relating to this exposure.
We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols for
personal information imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. Such
laws, standards and regulations, however, are evolving and subject to potentially differing interpretations, and federal, state and
provincial legislative and regulatory bodies may expand current or enact new laws or regulations regarding privacy matters. We
are unable to predict what additional legislation, standards or regulation in the area of privacy and security of personal
information could be enacted or its effect on our operations and business.
Government regulation of the Internet and email could adversely affect our business.
The laws governing general commerce on the Internet remain unsettled and it may take years to fully determine whether and
how existing laws such as those governing insurance, intellectual property, privacy and taxation apply to the Internet. In
addition, the growth and development of the market for electronic commerce and Internet-related pet medical plan
advertisements and transactions may prompt calls for more stringent consumer protection laws that may impose additional
burdens on companies conducting business and selling subscriptions to a pet medical plan over the Internet. Any new laws or
regulations or new interpretations of existing laws or regulations relating to the Internet could harm our business and we could
be forced to incur substantial costs in order to comply with them, which would harm our business, operating results and
financial condition.
Additionally, we use email to market our services to potential members and as a means of communicating with our existing
members. The laws and regulations governing the use of email for commercial purposes continue to evolve and the growth and
development of the market for commerce over the Internet may lead to the adoption of additional legislation. On July 1, 2014,
legislation became effective in Canada that, among other things, prohibits the sending of commercial electronic messages
without the express or implied consent of the recipient, subject to certain exceptions. Failure to abide by this new legislation
could lead to significant administrative monetary penalties and, as of July 1, 2017, civil liability exposure, including through
class actions. We have incurred, and will continue to incur, expenses to comply with electronic messaging laws. If new laws or
regulations are adopted, or existing laws and regulations are interpreted, to impose additional restrictions on our ability to send
email to our members or potential members, we may not be able to communicate with them in a cost-effective manner. In
addition to legal restrictions on the use of email for commercial purposes, Internet service providers, email service providers
and others attempt to block the transmission of unsolicited email, commonly known as “spam.” Many Internet and email
service providers have relationships with organizations whose purpose it is to detect and notify the Internet and email service
providers of entities that the organization believes is sending unsolicited email. If an Internet or email service provider
identifies email from us as “spam” as a result of reports from these organizations or otherwise, we could be placed on a
restricted list that will block our emails to members or potential members. If we are restricted or unable to communicate by
email with our members and potential members as a result of legislation, blockage or otherwise, our business, operating results
and financial condition would be harmed.
Applicable insurance laws regarding the change in control of our company may impede potential acquisitions that our
stockholders might consider to be desirable.
We are subject to statutes and regulations of the state of New York that generally require that any person or entity desiring to
acquire direct or indirect control of APIC obtain prior regulatory approval. These laws may discourage potential acquisition
proposals and may delay, deter or prevent a change in control of our company, including through transactions, and in particular
unsolicited transactions, that some of our stockholders might consider to be desirable. Similar laws or regulations may also
apply in other states in which we may operate.
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Our segregated account in Bermuda, WICL segregated account AX, could be adversely impacted by regulatory compliance
of a third party.
Wyndham Insurance Company (SAC) Limited (WICL) is a class 3 insurer regulated by the Bermuda Monetary Authority
(BMA). WICL’s ability to continue operations and pay dividends could impact the ability of our segregated account to do the
same. WICL’s failure to meet regulatory requirements set forth by the BMA could result in our inability to transact business
with WICL segregated account AX. Further, WICL could be limited from allowing dividends to be paid out of segregated
account AX in the event of adverse regulatory actions.
We will continue to incur significantly increased costs and devote substantial management time as a result of operating as a
public company.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. For
example, we are subject to the reporting requirements of the Exchange Act, and are required to comply with the applicable
requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the JOBS Act,
as well as rules and regulations subsequently implemented by the SEC and the stock exchange on which our common stock is
listed, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate
governance practices. Compliance with these requirements has and will continue to increase our legal and financial compliance
costs and will make some activities more time consuming and costly. In addition, from time to time, our management and other
personnel need to divert attention from operational and other business matters to devote substantial time to these public
company requirements. In particular, we have and will continue to incur significant expenses and devote substantial
management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will
increase when we are no longer an emerging growth company, as defined by the JOBS Act. Our management and other
personnel also have limited experience operating a public company, which may result in operational inefficiencies or errors. We
cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing
of such costs.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to
emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised
accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail
ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or
revised accounting standards as other public companies that are not emerging growth companies.
For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because
we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active
trading market for our common stock and our stock price may be more volatile.
We generally will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market
value of our common stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in
which we have total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which we issue more
than $1 billion in non-convertible debt in a three-year period or (iv) five years from the date of our IPO.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the
United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting
Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change
in these principles or interpretations could have a significant effect on our reported financial results, and could affect the
reporting of transactions completed before the announcement of a change.
Risks Related to Ownership of Our Common Stock
Our actual operating results may differ significantly from our guidance.
From time to time we have released, and may continue to release, guidance in our quarterly earnings conference call, quarterly
earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of
release. This guidance, which includes forward-looking statements, has been and will be based on projections prepared by our
management. These projections are not prepared with a view toward compliance with published guidelines of the American
Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or
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outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of
assurance with respect to the projections.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are
inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are
beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will
change. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as
variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The
principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with
analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the
guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an
estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the
variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment
decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth
in this “Risk Factors” section in this Annual Report on Form 10-K could result in the actual operating results being different
from our guidance, and the differences may be adverse and material.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our
business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the securities or industry analysts who publish research about us or our
business downgrade our stock or publish inaccurate or unfavorable evaluations of our company or our stock, the price of our
stock could decline. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the
market, which in turn could cause our stock price to decline.
The market price of our common stock has been and is likely to continue to be volatile, and you may be unable to sell your
shares at or above the price at which you purchased them.
The market price of our common stock has been and is likely to continue to fluctuate widely. Factors affecting the market price
of our common stock include:
•
•
•
•
•
•
•
•
•
•
•
variations in our operating results, earnings per share, cash flows from operating activities, and key financial and
operational metrics, and how those results compare to analyst expectations;
forward-looking guidance that we provide to the public and industry and financial analysts related to future revenue
and profitability, and any change in that guidance or our failure to achieve the results reflected in that guidance;
the net increases in the number of members, either independently or as compared with published expectations of
industry, financial or other analysts that cover our company;
changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to
follow our common stock;
announcements of changes to our medical plan, strategic alliances or significant agreements by us or by our
competitors;
announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions
involving us or our competitors;
recruitment or departure of key personnel;
the economy as a whole and market conditions in our industry;
trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding
common stock;
the number of shares of our stock trading on a regular basis; and
any other factors discussed in these risk factors.
In addition, if the market for stock in our industry or the stock market in general experiences uneven investor confidence, the
market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition.
The market price of our common stock might also decline in reaction to events that affect other companies within, or outside,
our industry even if these events do not directly affect us. Some companies that have experienced volatility in the trading price
34
of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in
substantial costs and a diversion of our management’s attention and resources.
We do not intend currently to pay dividends on our common stock and, therefore, any returns will be limited to the value of
our stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and
any future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any
cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock is limited by the
terms of our credit agreement, APIC’s ability to pay dividends is limited by New York state insurance laws, and WICL
Segregated Account AX’s ability to pay dividends is limited by our agreements with WICL as well as WICL’s regulatory
requirements. Any return to stockholders will therefore be limited to the increase, if any, of our stock price.
Our directors and principal stockholders own a significant percentage of our stock and will be able to exert significant
control over matters subject to stockholder approval.
Our directors, five percent or greater stockholders and their respective affiliates beneficially hold a significant amount of our
outstanding voting stock. Therefore, these stockholders have the ability to influence us through this ownership position. These
stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able
to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or
other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common
stock that you or other stockholders may feel are in your or their best interest as one of our stockholders.
Provisions in our restated certificate of incorporation, restated bylaws and Delaware law might discourage, delay or prevent
a change in control of our company or changes in our management and, therefore, depress the market price of our common
stock.
Our restated certificate of incorporation and restated bylaws contain provisions that could depress the market price of our
common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that
the stockholders of our company may deem advantageous. These provisions, among other things:
•
•
•
•
•
•
•
•
•
establish a classified board of directors so that not all members of our board are elected at one time;
permit only the board of directors to establish the number of directors and fill vacancies on the board;
provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;
require super-majority voting to amend some provisions in our restated certificate of incorporation and restated
bylaws;
authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights
plan (also known as a “poison pill”);
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our
stockholders;
prohibit cumulative voting; and
establish advance notice requirements for nominations for election to our board or for proposing matters that can be
acted upon by stockholders at annual stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our
company. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and
holders of 15% or more of our common stock.
35
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal executive offices are located at 907 NW Ballard Way, Seattle, Washington. The lease for our principal office is
for 37,500 square feet and expires in August 2016. We also occupy 12,000 square feet of office space in Seattle, Washington
pursuant to a lease that expires in March 2016 and 1,600 square feet of office space in Vancouver, British Columbia pursuant to
a lease that expires in March 2017.
During 2015, the Company entered into a lease agreement for a building located in Seattle, Washington. The initial 10-year
term of the lease is expected to commence in the second or third quarter of 2016 and will expire in 2026.
Item 3. Legal Proceedings
The Company is involved from time to time in claims, regulatory examinations and litigation, including the following:
We received an inquiry from the Washington State Office of the Insurance Commissioner (OIC) in December 2012 concerning
whether one of our subsidiaries was properly licensed, and whether certain of its employees were properly licensed, under
Washington law. A regulatory examination took place during the third and fourth quarters of 2014. On September 22, 2015, the
OIC issued a detailed report and we timely issued a response during the fourth quarter of 2015. As of December 31, 2015 and
2014, we had accrued liabilities of $0.4 million and $0.2 million, respectively, for this matter. Adverse outcomes beyond
recorded amounts are reasonably possible. At this stage in the matter, however, we are unable to estimate a possible loss or
range of possible loss beyond amounts accrued.
The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material
to our operating results and cash flows for a particular period. We make 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 impacts of negotiations,
estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.
In addition to the matters described above, from time to time we may be subject to various legal proceedings and claims in the
ordinary course of business activities, including claims of alleged infringement of trademarks, copyrights and other intellectual
property rights; employment claims; and general contract or other claims. We may, from time to time, also be subject to various
other legal or government claims, disputes or investigations.
Item 4. Mine Safety Disclosures
None.
36
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market for our Common Stock
Our common stock began trading on the New York Stock Exchange (NYSE) under the symbol “TRUP” on July 18, 2014. Prior to
that time, there was no public market for our common stock. The following table sets forth the high and low intra-day sales prices
per share for our common stock on the NYSE.
Fiscal Year 2015
Fiscal Year 2014
High
Low
High*
Low*
$
$
$
$
8.47
8.50
8.63
9.90
$
$
$
$
6.70
7.41
6.83
6.40
$
$
N/A
N/A
11.95
8.60
$
$
N/A
N/A
7.70
5.21
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
*Beginning July 18, 2014
Dividend Policy
We have never declared or paid cash dividends on our capital stock. Under our credit agreement, we are restricted from paying
any dividends or making any distributions on account of our capital stock. We currently intend to retain any future earnings for
use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further
determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws
and restrictions in our outstanding credit agreement, and will depend on our financial condition, results of operations, capital
requirements, general business conditions and other factors that our board of directors considers relevant.
Holders of Record
As of February 10, 2016, there were 56 stockholders of record of our common stock. The actual number of stockholders is greater
than this number of record holders, and includes stockholders who are beneficial owners, whose shares are held of record by
banks, brokers, and other financial institutions.
Securities Authorized for Issuance under Equity Compensation Plans
The information called for by this item is incorporated by reference to our Proxy Statement for the Annual Meeting of
Stockholders to be held in 2016. See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management.”
Stock Performance Graph
The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any
of our other filings under the Exchange Act or the Securities Act, except to the extent we specifically incorporate it by reference
into such filing.
This chart compares the cumulative total return on our common stock with that of the S&P Small Cap 600 Index and the
NASDAQ-100 Technology Sector Index. The chart assumes $100 was invested at the close of market on July 18, 2014, in our
common stock and the S&P Small Cap 600 Index, and assumes the reinvestment of any dividends. The stock price performance
on the following graph is not necessarily indicative of future stock price performance.
37
Company/Index
7/18/2014
9/30/2014
12/31/2014
3/30/2015
6/30/2015
9/30/2015
12/31/2015
Trupanion Inc.
$
100.00
$
74.57
$
60.82
$
70.19
$
72.28
$
66.23
$
85.61
S&P Small Cap 600
100.00
95.62
104.65
108.46
108.31
97.91
101.16
NASDAQ-100 Technology
Sector Index
Use of Proceeds
100.00
101.85
108.79
108.08
105.62
98.09
106.25
On July 17, 2014, our registration statement on Form S-1 (File No. 333-196814) was declared effective by the SEC for our IPO
pursuant to which we sold an aggregate of 8,193,750 shares of our common stock at a price to the public of $10.00 per share
resulting in net proceeds to us of $72.8 million, after deducting underwriting discounts and commissions and offering expenses.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the
SEC pursuant to Rule 424(b) under the Securities Act on July 18, 2014. Pending the uses described, we have invested the net
proceeds in short-term, investment-grade interest-bearing securities such as money market funds.
Issuer Purchases of Equity Securities
Not applicable.
38
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial and other data should be read with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere
in this Annual Report on Form 10-K. The selected consolidated statements of operations data for the years ended December 31,
2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our audited
consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated
statements of operations data for the years ended December 31, 2012 and 2011 and the consolidated balance sheet data as of
December 31, 2013, and 2012 and 2011 are derived from our audited consolidated financial statements not included in this
Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in any future
period.
In 2015, the prior period financial data and metrics have been recast to reflect the movement of certain pets from the
subscription business segment to the other business segment. Refer to “Management’s Discussion and Analysis—Basis of
Presentation” for further details.
Consolidated Statements of Operations Data:
Revenue:
Subscription business
Other business
Total revenue
Cost of revenue:
Subscription business(1)
Other business
Total cost of revenue
Gross profit:
Subscription business
Other business
Total gross profit
Operating expenses:
Sales and marketing(1)
Technology and development(1)
General and administrative(1)
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss attributable to common stockholders
Net loss per share attributable to common
stockholders—basic and diluted(2)
Weighted average number of shares outstanding used
to compute net loss per share attributable to common
stockholders—basic and diluted(2)
Years Ended
December 31,
2015
2014
2013
2012
2011
(in thousands, except share and per share data)
$
133,406
$
103,502
$
76,413
$
55,352
$
37,045
13,557
146,963
109,428
12,306
121,734
23,978
1,251
25,229
15,231
11,215
15,558
42,004
(16,775)
325
(9)
(17,091)
114
(17,205) $
(17,205) $
12,408
115,910
85,169
10,867
96,036
18,333
1,541
19,874
11,608
9,899
14,312
35,819
(15,945)
6,726
(1,487)
(21,184)
(7)
(21,177) $
(21,177) $
7,416
83,829
61,394
6,791
68,185
15,019
625
15,644
9,091
4,888
8,652
22,631
(6,987)
609
178
55,530
44,185
134
44,319
11,167
44
11,211
7,149
3,406
6,195
16,750
(5,539)
535
671
(8,267)
(92)
(8,175) $
(8,175) $
252
(6,326)
84
(6,410) $
(8,147) $
—
37,045
29,002
—
29,002
8,043
—
8,043
5,206
1,499
4,289
10,994
(2,951)
690
186
(3,827)
92
(3,919)
(3,919)
(0.62) $
(1.64) $
(6.23) $
(9.76) $
(5.34)
$
$
$
27,638,443
12,934,477
1,312,019
834,648
734,411
39
Other Financial and Operational Data(3):
Total subscription pets enrolled
Monthly adjusted revenue per pet(4)
Lifetime value of a pet
Average pet acquisition cost(5)
Average monthly retention
Adjusted EBITDA (in thousands)(6)
Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Working capital
Total assets
Warrant liabilities
Current and long-term debt
Total liabilities
Convertible preferred stock
Stockholders’ equity (deficit)
Years Ended
December 31,
2015
2014
2013
2012
2011
272,636
45.04
591
132
$
$
$
215,491
44.14
591
121
$
$
$
98.64%
$ (11,297)
98.69%
$ (10,349)
168,405
42.56
619
104
98.65%
(4,351)
$
$
$
$
125,387
41.99
557
100
98.51%
(3,904)
$
$
$
$
$
$
$
$
88,707
41.00
500
84
98.24%
(1,862)
As of
December 31,
2015
2014
2013
2012
2011
(in thousands)
$
17,956
$
53,098
$
14,939
$
4,234
$
25,288
30,016
70,917
—
—
25,561
—
22,371
62,111
98,306
—
14,900
39,031
—
45,356
59,275
16,088
13,710
51,653
4,900
26,099
52,928
10,809
7,746
27,666
551
9,900
23,015
8,087
9,370
12,689
24,863
333
9,900
17,743
31,724
(32,999)
31,724
(27,073)
25,792
(18,672)
(1) Includes stock-based compensation expense as follows:
Years Ended
December 31,
2015
2014
2013
2012
2011
Cost of revenue
Sales and marketing
Technology and development
General and administrative
$
$
263
446
404
315
553
461
1,889
2,755
(in thousands)
230
$
$
677
351
680
$
109
428
268
629
Total stock-based compensation expense
$
3,002
$
4,084
$
1,938
$
1,434
$
65
288
165
464
982
(2) See note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a
description of the method used to compute basic and diluted net loss per share attributable to common stockholders.
(3) For more information about how we calculate total subscription pets enrolled, monthly adjusted revenue per pet,
lifetime value of a pet, average pet acquisition cost and average monthly retention, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics.”
(4) Monthly adjusted revenue per pet is calculated in part based on adjusted revenue, a non-GAAP financial measure, that
we define as revenue from our subscription business segment excluding sign-up fee revenue and the change in deferred
revenue between periods. For more information about adjusted revenue and a reconciliation of revenue to adjusted
revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP
Financial Measures.”
40
(5) Average pet acquisition cost is calculated in part based on acquisition cost and net acquisition cost, non-GAAP financial
measures. Acquisition cost is defined as sales and marketing expenses, excluding stock-based compensation expense.
Net acquisition cost is defined as acquisition cost, net of sign-up fee revenue and other business segment sales and
marketing expense. For more information about acquisition cost, net acquisition cost and a reconciliation of sales and
marketing expenses to acquisition cost and net acquisition cost, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
(6) Adjusted EBITDA is a non-GAAP financial measure that we define as net loss excluding stock-based compensation
expense, depreciation and amortization expense, interest income, interest expense, change in fair value of warrant
liabilities and income tax expense (benefit). For more information about Adjusted EBITDA, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
41
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
Overview
We provide a medical insurance plan for cats and dogs throughout the United States, Canada and Puerto Rico. Our data-driven,
vertically-integrated approach enables us to provide pet owners with what we believe is the highest value medical plan for their
pets, priced specifically for each pet’s unique characteristics. Our growing and loyal member base provides us with highly
predictable and recurring revenue. We operate our business similar to other subscription-based businesses, with a focus on
maximizing the lifetime value of each pet while sustaining a favorable ratio of lifetime value relative to acquisition cost.
We operate in two business segments: subscription business and other business. We generate revenue in our subscription
business segment primarily from subscription fees for our medical plan, which we actively market to consumers. Our medical
plan automatically renews on a monthly basis, and members pay the subscription fee at the beginning of each subscription
period, in most cases by authorizing us to directly charge their credit card, debit card or bank account through automatic funds
transfer. Subscription revenue is recognized on a pro rata basis over the monthly enrollment term. We generate revenue in our
other business segment primarily from operations that are not directly marketed to consumers. These policies provide different
coverage and are subject to materially different terms and conditions than our primary medical plan.
We generate leads for our subscription business through both third-party referrals and online member acquisition channels,
which we then convert into members through our website and contact center. Veterinary practices represent our largest referral
source. We engage a national referral network of independent contractors who are paid fees based on activity in their regions,
which we refer to as our Territory Partners. Our Territory Partners are dedicated to cultivating direct veterinary relationships
and building awareness of the benefits that our medical plan offers veterinarians and their clients. Veterinarians then educate pet
owners, who visit our website or call our contact center to learn more about, and potentially enroll in, our medical plan. Our
online member acquisition channels serve as important resources for pet owner education and drive new member leads and
conversion. We also receive a significant number of new leads from existing members adding pets and referring their friends
and family members. We constantly evaluate the effectiveness of our member acquisition channels and marketing initiatives
based upon their return on investment, which we measure by comparing the ratio of the lifetime value of a pet generated
through each specific channel or initiative to the related pet acquisition cost.
Our revenue increased from $115.9 million for the year ended December 31, 2014 to $147.0 million for the year ended
December 31, 2015, representing 27% year-over-year growth. We have made and expect to continue to make substantial
investments in member acquisition and in expanding our operations. For the year ended December 31, 2015, 2014, and 2013,
we had a net loss of $17.2 million, $21.2 million and $8.2 million, respectively. As of December 31, 2015, our accumulated
deficit was $74.4 million.
Key Financial and Operating Metrics
We believe that one of the key operating drivers for any subscription business is the amount of sales and marketing expenses
incurred to drive new customer acquisition, which is typically evaluated in relation to lifetime value. In order to assess this
metric, we regularly review a number of financial and operating metrics, including per pet unit economics, to evaluate our
subscription business, determine the allocation of resources and make decisions regarding business strategy.
42
The following tables set forth our key financial and operating metrics for our subscription business for the periods ended
December 31, 2015, 2014 and 2013 and for each of the last eight fiscal quarters. In 2015, the prior period financial data and
metrics have been recast to reflect the movement of certain pets from the subscription business segment to the other business
segment. Refer to “Management’s Discussion and Analysis—Basis of Presentation” for further details. Additionally, we have
modified our non-GAAP financial measures to include net acquisition cost, which was defined as acquisition cost in prior
periods, and modify the definition of acquisition cost used in previous periods to more closely align with how management has
begun to view and discuss our business. The calculation of our key metric, average pet acquisition cost, did not changed.
Total pets enrolled (at period end)
Total subscription pets enrolled (at period end)
Monthly adjusted revenue per pet
Lifetime value of a pet (LVP)
Average pet acquisition cost (PAC)
Average monthly retention
Adjusted EBITDA (in thousands)
Years Ended December 31,
2015
291,818
272,636
45.04
591
132
98.64%
(11,297)
$
$
$
$
2014
232,450
215,491
44.14
591
121
98.69%
(10,349)
$
$
$
$
$
$
$
$
2013
182,497
168,405
42.56
619
104
98.65%
(4,351)
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
Period Ended
Total pets enrolled (at period
end)
Total subscription pets
enrolled (at period end)
Monthly adjusted revenue
per pet
Lifetime value of a pet
(LVP)
Average pet acquisition cost
(PAC)
Average monthly retention
Adjusted EBITDA (in
thousands)
291,818
276,988
259,948
246,106
232,450
221,479
207,969
194,902
272,636
258,546
241,808
228,409
215,491
205,194
192,338
179,819
$ 45.48
$ 45.15
$ 45.10
$ 44.34
$ 44.79
$ 44.88
$ 43.60
$ 43.07
$
$
591
132
$
$
591
129
$
$
570
133
$
$
567
134
$
$
591
145
$
$
580
115
$
$
602
114
$
$
612
113
98.64%
98.66%
98.67%
98.66%
98.69%
98.67%
98.65%
98.65%
$ (1,588)
$ (3,211)
$ (3,165)
$ (3,333)
$ (2,903)
$ (2,908)
$ (2,459)
$ (2,079)
Total pets enrolled. Total pets enrolled reflects the number of pets subscribed to either our plan or one of the insurance
products offered in our other business segment at the end of each period presented. We monitor total pets enrolled because it
provides an indication of the growth of our consolidated business.
Total subscription pets enrolled. Total subscription pets enrolled reflects the number of pets subscribed to the plan marketed by
Trupanion at the end of each period presented. We monitor total subscription pets enrolled because it provides an indication of
the growth of our subscription business.
Monthly adjusted revenue per pet. Monthly adjusted revenue per pet is calculated as adjusted revenue divided by the total
number of subscription pet months in the period. Adjusted revenue, a non-GAAP financial measure, is calculated as
subscription business revenue, excluding sign-up fee revenue and the change in deferred revenue. We exclude sign-up fee
revenue since it is collected at the time a new pet is enrolled and is used to partially offset initial setup costs, which are included
in sales and marketing expenses. We exclude changes in deferred revenue in order to present monthly adjusted revenue per pet
in a consistent manner across periods. Total subscription pet months in a period represents the sum of all pets enrolled for each
month during the period. We monitor monthly adjusted revenue per pet because it is an indicator of the per unit economics of
our business.
43
Lifetime value of a pet. Lifetime value of a pet (LVP) is calculated in part based on gross profit from our subscription business
segment for the 12 months prior to the period end date excluding stock-based compensation expense related to cost of revenue
from our subscription business segment, sign-up fee revenue and the change in deferred revenue between periods, multiplied by
the implied average subscriber life in months. Implied average subscriber life in months is calculated as the quotient obtained
by dividing one by one minus the average monthly retention rate. We monitor LVP to assess how much lifetime value we might
expect from new pets over their implied average subscriber life in months and to evaluate the amount of sales and marketing
expenses we may want to incur to attract new pet enrollments.
Average pet acquisition cost. Pet acquisition cost (PAC) is calculated as net acquisition cost divided by the total number of new
pets enrolled in that period. Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as sales and
marketing expenses, excluding stock-based compensation, offset by sign-up fee revenue and other business segment sales and
marketing expenses. We offset sales and marketing expenses with sign-up fee revenue since it is a one-time charge to new
members used to partially offset initial setup costs, which are included in sales and marketing expenses. We monitor average
pet acquisition cost to evaluate the efficiency of our sales and marketing programs in acquiring new members and measure
effectiveness using the ratio of our lifetime value of a pet to average pet acquisition cost.
Average monthly retention. Average monthly retention is measured as the monthly retention rate of enrolled pets for each
applicable period averaged over the 12 months prior to the period end date. As such, our average monthly retention rate as of
December 31, 2015 is an average of each month’s retention from January 1, 2015 through December 31, 2015. We calculate
monthly retention as the number of pets that remain after subtracting all pets that cancel during a month, including pets that
enroll and cancel within that month, divided by the total subscription pets enrolled at the beginning of that month. We monitor
average monthly retention because it provides a measure of member satisfaction and allows us to calculate the implied average
subscriber life in months and manage our business.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we define as net loss excluding stock-based
compensation expense, depreciation and amortization expense, interest income, interest expense, change in fair value of
warrant liabilities and income tax (benefit) expense. For more information about adjusted EBITDA and a reconciliation of net
loss to adjusted EBITDA, see Non-GAAP Financial Measures below.
Non-GAAP Financial Measures
We believe that using adjusted revenue, acquisition cost, net acquisition cost and adjusted EBITDA to calculate and present
certain of our other key metrics is helpful to our investors. These measures, which are non-GAAP financial measures, are not
prepared in accordance with U.S. GAAP. We define adjusted revenue as revenue from our subscription business segment
excluding sign-up fee revenue and the change in deferred revenue between periods. We define acquisition cost as sales and
marketing expenses, excluding stock-based compensation expense. We define net acquisition cost as acquisition cost net of
sign-up fee revenue and other business segment sales and marketing expenses. We define adjusted EBITDA as net loss
excluding stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, change
in fair value of warrant liabilities and income tax expense (benefit).
Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other
companies in our industry as other companies in our industry may calculate or use non-GAAP financial measures differently. In
addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not
prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude
expenses that may have a material impact on our reported financial results. Further, stock-based compensation expense and
other items used in the calculation of adjusted EBITDA have been and will continue to be for the foreseeable future significant
recurring expenses in our business. The presentation and utilization of non-GAAP financial measures is not meant to be
considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We
urge our investors to review the reconciliation of our non-GAAP financial measures to the most directly comparable GAAP
financial measures in our consolidated financial statements that is included below, and not to rely on any single financial or
operating measure to evaluate our business.
Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can
impact a company’s non-cash expenses, we believe that providing non-GAAP financial measures such as acquisition cost, net
acquisition cost and adjusted EBITDA that exclude stock-based compensation expense and, in the case of adjusted EBITDA,
the change in fair value of warrant liabilities allows for more meaningful comparisons between our operating results from
period to period. We exclude sign-up fee revenue from the calculation of adjusted revenue because we collect it from new
members at the time of enrollment and consider it to be an offset to a portion of our sales and marketing expenses. For this
reason, we also net sign-up fees with sales and marketing expenses in our calculation of net acquisition cost. We exclude
changes in deferred revenue from the calculation of adjusted revenue in order to eliminate fluctuations caused by the timing of
pet enrollment during the last month of any particular period in which such measures are being presented or utilized. We
exclude the change in fair value of warrant liabilities from our calculation of adjusted EBITDA in order to eliminate
44
fluctuations caused by changes in our stock price. We believe this allows us to calculate and present adjusted revenue,
acquisition cost, and net acquisition cost and the related financial measures we derive from them, as well as adjusted EBITDA,
in a consistent manner across periods. Our non-GAAP financial measures and the related financial measures we derive from
them are important tools for financial and operational decision-making and for evaluating our own operating results over
different periods of time.
The following table reflects the reconciliation of adjusted revenue to revenue:
Revenue
Excluding:
Other business revenue
Change in deferred revenue
Sign-up fee revenue
Adjusted revenue
Years Ended December 31,
2015
2014
2013
$
146,963
(in thousands)
115,910
$
$
83,829
(13,557)
1,450
(1,983)
132,873
$
(12,408)
978
(1,572)
102,908
$
$
(7,416)
1,107
(1,418)
76,102
Revenue
Excluding:
Other business
revenue
Change in deferred
revenue
Sign-up fee revenue
Three Months Ended
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
(in thousands)
$ 40,201
$ 37,865
$ 35,587
$ 33,310
$ 31,868
$ 30,312
$ 28,090
$
25,640
(3,479)
(3,445)
(3,379)
(3,254)
(3,251)
(3,200)
(3,178)
(2,779)
378
(506)
423
(542)
321
(451)
328
(484)
$ 29,900
247
(363)
$ 28,501
385
(425)
$ 27,072
84
(407)
$ 24,589
$
262
(377)
22,746
Adjusted revenue
$ 36,594
$ 34,301
$ 32,078
45
The following table reflects the reconciliation of acquisition cost and net acquisition cost to sales and marketing expenses:
Years Ended December 31,
2015
2014
2013
Sales and marketing expenses
Excluding:
Stock-based compensation expense
Acquisition cost
Net of:
$
15,231
(in thousands)
11,608
$
$
(446)
14,785
(553)
11,055
Sign-up fee revenue
Other business segment sales and marketing expense
Net acquisition cost
(1,983)
(80)
12,722
$
(1,572)
(124)
9,359
$
$
9,091
(677)
8,414
(1,418)
(21)
6,975
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
(in thousands)
Three Months Ended
$
3,919
$
4,128
$
3,533
$
3,651
$
3,218
$
2,934
$
2,810
$
2,646
(104)
3,815
(102)
4,026
(110)
3,423
(130)
3,521
(147)
3,071
(115)
2,819
(144)
2,666
(149)
2,497
Sales and marketing
expenses
Excluding:
Stock-based
compensation expense
Acquisition cost
Net of:
Sign-up fee revenue
(506)
(542)
(451)
(484)
(363)
(425)
(407)
(377)
Other business segment
sales and marketing
expense
(8)
(16)
(30)
Net acquisition cost
$
3,301
$
3,468
$
2,942
$
(26)
3,011
$
(30)
2,678
$
(22)
2,372
$
(28)
2,231
$
(44)
2,076
The following table reflects the reconciliation of adjusted EBITDA to net loss:
Net loss
Excluding:
Stock-based compensation expense
Depreciation and amortization expense
Interest income
Interest expense
Change in fair value of warrant liabilities
Income tax expense (benefit)
Adjusted EBITDA
Years Ended December 31,
2015
2014
2013
(in thousands)
$
(17,205) $
(21,177) $
(8,175)
3,002
2,542
(75)
325
—
114
(11,297) $
$
4,084
1,675
(74)
6,726
(1,575)
(8)
(10,349) $
1,938
892
(102)
645
543
(92)
(4,351)
46
Three Months Ended
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
(in thousands)
$ (3,001) $ (4,643) $ (4,625) $ (4,936) $ (4,276) $ (8,509) $ (3,479) $ (4,913)
653
741
(19)
26
—
749
672
(19)
14
—
897
563
(18)
40
—
703
566
(19)
245
—
890
2,001
441
(18)
103
505
(20)
5,155
626
419
(18)
726
567
310
(18)
742
—
(2,054)
(740)
1,219
12
14
$ (1,588) $ (3,211) $ (3,165) $ (3,333) $ (2,903) $ (2,908) $ (2,459) $ (2,079)
(22)
108
(43)
16
14
7
Net loss
Excluding:
Stock-based
compensation expense
Depreciation and
amortization expense
Interest income
Interest expense
Change in fair value of
warrant liabilities
Income tax expense
(benefit)
Adjusted EBITDA
Factors Affecting Our Performance
Average monthly retention. Our performance depends on our ability to continue to retain our existing and newly enrolled pets
and is impacted by our ability to provide a best-in-class value and member experience. Our ability to maintain the retention rate
of enrolled pets may be affected by a number of factors, including the actual and perceived value of our services and the quality
of our member experience, our claims payment process and the competitive environment. In addition, if the number of new
pets enrolled increases at a faster rate than our historical experience, our average monthly retention rate could be adversely
impacted, as our retention rate is generally lower during the first year of member enrollment.
Investment in pet acquisition. We have made and plan to continue to make significant investments to grow our member base.
Our net acquisition cost and the number of new members we enroll depends on a number of factors, including the amount we
elect to invest in sales and marketing activities in any particular period in the aggregate and by channel, effectiveness of our
sales execution and marketing initiatives, changes in costs of media, the mix of our sales and marketing expenditures and the
competitive environment. Our average pet acquisition cost has in the past significantly varied and in the future may
significantly vary from period to period based upon specific marketing initiatives and the actual or expected relationship to
LVP. For example, veterinary trade show costs may increase our average pet acquisition costs (historically, during the first
quarter of each year) and the timing of our Territory Partner conference may increase our average pet acquisition cost in a given
period (historically, during the fourth quarter of each year). We also regularly test new member acquisition channels and
marketing initiatives, which may be more expensive than our traditional marketing channels and increase our average
acquisition costs. We plan to expand the number of Territory Partners and continue testing new member acquisition channels
and marking initiatives, which is likely to increase our average pet acquisition cost. We continually assess our sales and
marketing activities by monitoring the ratio of LVP to PAC.
Timing of initiatives. Over time we plan to implement new initiatives to improve our member experience, make modifications
to our medical plan and find other ways to maintain a strong value proposition for our members. These initiatives will
sometimes be accompanied by price adjustments, in order to compensate for an increase in benefits received by our members.
The implementation of such initiatives may not always coincide with the timing of price adjustments resulting in fluctuations in
revenue and gross profit in our subscription business segment.
Geographic mix of sales. The relative mix of our business between the United States and Canada impacts the monthly
adjusted revenue per pet we receive. Prices for our plan in Canada are generally higher than in the United States, which is
consistent with the relative cost of veterinary care in each country. As our revenue has grown faster in the United States
compared to Canada, this geographic shift in the mix of business has reduced the growth in our monthly adjusted revenue per
pet. In addition, as our mix of revenue changes between the United States and Canada, our exposure to foreign exchange
fluctuations will be impacted.
47
Other business segment. Our other business segment includes revenue and expenses related to our writing of policies for an
unaffiliated general agent. This relationship can be canceled by the unaffiliated general agent within 360 days’ notice and we
are unlikely to be able to replace it with a similar contract quickly, if at all. A cancellation of this contract would result in the
policies and revenue being run off over a period of 12 months and could have a material impact on our results of operations.
Our other business segment also includes revenue and expenses related to policies written under a federal government program.
We may enter into additional relationships to the extent we believe they will be profitable to us, which could also impact our
operating results.
Basis of Presentation
General
We operate in two business segments: subscription business and other business. Our subscription business segment includes
revenue and expenses related to monthly subscriptions for our medical plan, which we actively market to consumers. Our other
business segment includes revenue and expenses related to our other operations that are not directly marketed to consumers.
During 2015, we began reporting certain pets previously included in our subscription business segment in our other business
segment due to the characteristics of this business being marketed to enterprises rather than consumers, similar to other
arrangements within the other business segment. These pets were previously included in our subscription business segment.
Segment information for prior periods has been recast to reflect this change. We report our financial information in accordance
with U.S. GAAP.
Revenue
We generate revenue in our subscription business segment primarily from subscription fees for our medical plan. Our medical
plan automatically renews on a monthly basis, and members pay the subscription fee at the beginning of each subscription
period, in most cases by authorizing us to directly charge their credit card, debit card or bank account through automatic funds
transfer. Subscription revenue is recognized on a pro rata basis over the monthly enrollment term. Membership may be
canceled at any time without penalty, and we issue a refund for the unused portion of the canceled membership.
We generate revenue in our other business segment primarily from writing policies which are not directly marketed to
consumers. Revenue from our other business segment is recognized on a pro rata basis over the enrollment term for each
policy.
Cost of Revenue
Cost of revenue in each of our segments is comprised of claims expenses and other cost of revenue.
Claims expenses
Claims expenses include claims incurred, the cost of personnel administering the claims and providing member
service relating to the claims and other operating expenses directly or indirectly related to claims administration.
Claims incurred are the claims approved for payment plus an accrual for claims incurred that have not yet been
submitted or approved for payment. This accrual is based on our historical experience and developments in claims
frequency and severity and the cost of veterinary care, and also includes the cost of administering such claims.
Other cost of revenue
Other cost of revenue for our subscription business segment includes direct and indirect member service expenses,
renewal fees to our independent referral network, credit card transaction fees and premium tax expenses. Other cost of
revenue for our other business segment includes the commission we pay to the unaffiliated general agent and premium
taxes on other policies in this segment.
For both our subscription business and our other business segments, we generally expect our cost of revenue to remain
relatively constant as a percentage of revenue, although there may be some periodic variability due to a number of factors
including the rate of claims occurrences during such periods. Claims expenses as a percentage of our subscription business
revenue may increase over time as part of our strategy to return more value to our members to further enhance our member
experience, retention rates and lifetime value of a pet. We currently expect that, in the long-term, such increases generally
would be offset by economies of scale in our other cost of revenue.
Gross Profit
Gross profit is total revenue less cost of revenue. We expect gross profit as a percentage of revenue in our subscription segment
to remain relatively consistent in the long-term, although there has been and may be in the future some periodic variability due
to a number of factors, including the rate of claims occurrences during such periods and in the timing and significance of our
pricing adjustments. The timing of our implementation of various initiatives to improve the experience of our members also
may affect gross profit in the short-term. Further, as the mix of subscription business and other business changes and as we add
or modify relationships in our other business segment, this may impact our total gross profit as a percentage of revenue.
48
Operating Expenses
Our operating expenses are classified into three categories: sales and marketing, technology and development, and general and
administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs,
bonuses and stock-based compensation.
Sales and Marketing
Sales and marketing expenses primarily consist of costs to educate veterinarians and policy holders about our policy,
converting leads to enrolled pets, print, online and promotional advertising costs, strategic partnership fees and
employee compensation and related costs. Sales and marketing expenses are driven primarily by investments to
acquire new members. We plan to continue to invest in existing and new member acquisition channels and marketing
initiatives to grow our business. Investments in new member acquisition channels and marketing initiatives are
generally more expensive than our traditional marketing channels and increase our average pet acquisition cost. We
expect sales and marketing expenses to increase in absolute dollars, although it may fluctuate as a percentage of
revenue. We generally target a ratio of lifetime value of a pet to average pet acquisition cost of 5 to 1.
Technology and Development
Technology and development expenses primarily consist of personnel costs and related expenses for our 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. We expect technology and
development expenses to decrease in absolute dollars and decrease as a percentage of revenue in the near term as
fewer resources are needed for the development of our direct pay technology.
General and Administrative
General and administrative expenses consist primarily of personnel costs and related expenses for our finance,
actuarial, human resources, regulatory, legal, general management functions, as well as facilities and professional
services. We expect general and administrative expenses to decrease as a percentage of revenue as we begin to
experience scale in our fixed costs.
49
Results of Operations
The following tables set forth our results of operations for the periods presented both in absolute dollars and as a percentage of
our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future
results.
In 2015, the prior period financial data and metrics have been recast to reflect the movement of certain pets from the
subscription business segment to the other business segment. Refer to “—Basis of Presentation” for further details.
Consolidated Statements of Operations Data:
Years Ended December 31,
2015
2014
2013
(in thousands)
Revenue:
Subscription business
Other business
Total revenue
Cost of revenue:
Subscription business(1)
Other business
Total cost of revenue
Gross profit:
Subscription business
Other business
Total gross profit
Operating expenses:
Sales and marketing(1)
Technology and development(1)
General and administrative(1)
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
(1)
Includes stock-based compensation expense as follows:
Cost of revenue
Sales and marketing
Technology and development
General and administrative
Total stock-based compensation expense
$
133,406
$
103,502
$
13,557
146,963
109,428
12,306
121,734
23,978
1,251
25,229
15,231
11,215
15,558
12,408
115,910
85,169
10,867
96,036
18,333
1,541
19,874
11,608
9,899
14,312
42,004
(16,775)
325
(9)
(17,091)
114
(17,205) $
35,819
(15,945)
6,726
(1,487)
(21,184)
(7)
(21,177) $
76,413
7,416
83,829
61,394
6,791
68,185
15,019
625
15,644
9,091
4,888
8,652
22,631
(6,987)
609
671
(8,267)
(92)
(8,175)
Years Ended December 31,
2015
2014
2013
(in thousands)
315
$
263
446
404
1,889
3,002
$
$
$
230
677
351
680
1,938
553
461
2,755
4,084
$
$
$
50
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Technology and development
General and administrative
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Subscription business revenue
Subscription business cost of revenue
Subscription business gross profit
Years Ended December 31,
2015
2014
2013
100 %
100 %
100 %
83
17
10
8
11
29
(12)
—
—
(12)
—
83
17
10
9
12
31
(14)
5
(1)
(18)
—
81
19
11
6
10
27
(8)
1
1
(10)
—
(12)%
(18)%
(10)%
Years Ended December 31,
2015
2014
2013
100%
82
18%
100%
82
18%
100%
80
20%
51
In 2015, the prior period financial data and metrics have been recast to reflect the movement of certain pets from the
subscription business segment to the other business segment. Refer to “Management’s Discussion and Analysis—Basis of
Presentation” for further details.
Comparison of the years ended December 31, 2015, 2014 and 2013
Revenue
Revenue:
Subscription business
Other business
Total revenue
Percentage of Revenue by Segment:
Subscription business
Other business
Total revenue
Subscription Business:
Total pets enrolled (at period end)
Total subscription pets enrolled (at period end)
Monthly adjusted revenue per pet
Average monthly retention
Years Ended December 31,
2015
2014
2013
(in thousands, except percentages, pet and per pet data)
2015 to
2014 %
Change
2014 to
2013 %
Change
$
$
133,406
13,557
146,963
$
$
103,502
12,408
115,910
$
$
76,413
7,416
83,829
29%
9
27
35%
67
38
91%
9
100%
89%
11
100%
91%
9
100%
291,818
272,636
232,450
215,491
$
45.04
$
44.14
$
98.64%
98.69%
182,497
168,405
42.56
98.65%
26
27
2
27
28
4
Year ended December 31, 2015 compared to year ended December 31, 2014. Total revenue increased by $31.1 million to
$147.0 million for the year ended December 31, 2015, or 27%. Revenue from our subscription business segment increased by
$29.9 million to $133.4 million for the year ended December 31, 2015, or 29%. The increase in subscription business revenue
was primarily due to a 27% increase in total subscription pets enrolled as of December 31, 2015 compared to December 31,
2014. Adjusted revenue per pet increased from $44.14 to $45.04, or 2%, for the same period due to increases in pricing to cover
the increased cost of veterinary care. The impact of the increase was partially offset by an approximate $4.8 million impact of
foreign exchange rates on our Canadian revenue. Revenue from our other business segment increased $1.2 million to $13.6
million for the year ended December 31, 2015, or 9%, due to an increase in enrolled pets in this segment.
Year ended December 31, 2014 compared to year ended December 31, 2013. Total revenue increased by $32.1 million to
$115.9 million for the year ended December 31, 2014, or 38%. Revenue for our subscription business segment increased by
$27.1 million to $103.5 million for the year ended December 31, 2014, or 35%. This increase in subscription business revenue
was primarily due to a 28% increase in total subscription pets enrolled as of December 31, 2014 compared to December 31,
2013. Adjusted revenue per pet increased from $42.56 to $44.14, or 4%, for the same period due to pricing increases. The
impact of the increase was partially offset by an approximate $2.1 million impact of foreign exchange rates on our Canadian
revenue. Revenue from our other business segment increased $4.9 million to $12.4 million for the year ended December 31,
2014, as a result of the remaining policies written for the unaffiliated general agent being transferred to us from its previous
underwriting company, whereas only a portion of such policies had been transferred from its previous underwriting company
during the year ended December 31, 2013. Included in the increase in our other business revenue is $0.9 million related to
medical plans under a federal government program that started in March 2014.
52
Cost of Revenue
Cost of Revenue:
Subscription business:
Claims expenses
Other cost of revenue
Total cost of revenue
Gross profit
Other business:
Claims expenses
Other cost of revenue
Total cost of revenue
Gross profit
Total pets enrolled (at period end)
Total subscription pets enrolled (at period end)
Percentage of Revenue by Segment:
Subscription business:
Claims expenses
Other cost of revenue
Total cost of revenue
Gross profit
Other business:
Claims expenses
Other cost of revenue
Total cost of revenue
Gross profit
Years Ended December 31,
2015
2014
2013
2015 to
2014 %
Change
2014 to
2013 %
Change
(in thousands, except percentages)
$
95,420
14,008
109,428
23,978
7,904
4,402
12,306
1,251
291,818
272,636
$
74,206
10,963
85,169
18,333
5,707
5,160
10,867
1,541
232,450
215,491
$
53,288
8,106
61,394
15,019
3,349
3,442
6,791
625
182,497
168,405
29%
39%
28
28
31
38
(15)
13
(19)
26
27
35
39
22
70
50
60
147
27
28
72%
72%
70%
10
82
18
58
32
91
9
11
82
18
46
42
88
12
11
80
20
45
46
92
7
Year ended December 31, 2015 compared to year ended December 31, 2014. Cost of revenue for our subscription business
segment was $109.4 million, or 82% of revenue, for the year ended December 31, 2015, compared to $85.2 million or 82% of
revenue for the year ended December 31, 2015. This $24.3 million increase in subscription cost of revenue was primarily the
result of a 27% increase in enrolled pets and a 29% increase in claims expense for our subscription business. Compensation
expense and related costs increased by $1.8 million due to a 12% increase in employee headcount to service our growth and
improve our member experience. There was an additional $3.5 million benefit of foreign exchange rates on our Canadian costs.
Cost of revenue for our other business segment increased $1.4 million to $12.3 million for the year ended December 31, 2015,
due to an increase in enrolled pets in this segment. Our employer paid pets in this segment have historically been at a lower
margin than other pets in this segment and they have increased 14% from 2014 to 2015, decreasing our other business segment
gross margin from 12% to 9%.
53
Year ended December 31, 2014 compared to year ended December 31, 2013. Cost of revenue for our subscription business
segment was $85.2 million, or 82% of revenue, for the year ended December 31, 2014, compared to $61.4 million, or 80% of
revenue, for the year ended December 31, 2013. This $23.8 million increase in subscription cost of revenue was the result of an
increase in claims expenses, which were 72% of revenue for the year ended December 31, 2014, compared to 70% of revenue
for the year ended December 31, 2013. We have in the past and expect in the future to experience fluctuations in the claims
ratio from quarter to quarter. During 2014, the claims expense ratio was higher than our historical average due to a higher
frequency of claims than previous periods, which primarily was driven by the implementation of several key initiatives
designed to improve our member experience. In addition, compensation expense and related costs increased by $1.7 million
due to a 43% increase in employee headcount to service our growth and improve our member experience.
Cost of revenue for our other business segment increased $4.1 million to $10.9 million for the year ended December 31, 2014.
This increase is primarily a result of having the full business for the unaffiliated general agent for the entire twelve months of
2014, as well as the addition of a government program that began in 2014.
Sales and Marketing Expenses
Sales and marketing
Percentage of total revenue
Years Ended December 31,
2015
2014
2013
(in thousands, except percentages and per pet data)
2015 to
2014 %
Change
2014 to
2013 %
Change
$
15,231
$
11,608
$
9,091
31%
28%
10%
10%
11%
Subscription Business:
Total subscription pets enrolled (at period end)
Average pet acquisition cost (PAC)
Lifetime Value of Pet (LVP)
272,636
132
591
215,491
121
591
168,405
104
619
$
$
$
$
$
$
27
9
—
28
16
(5)
Year ended December 31, 2015 compared to year ended December 31, 2014. Sales and marketing expenses increased $3.6
million to $15.2 million for the year ended December 31, 2015, or 31%, yet remained consistent as a percentage of revenue.
The increase in sales and marketing expenses was primarily due to an increase of $0.5 million in expenditures related to new
and expanded online marketing initiatives and public relations, a $0.8 million increase in print advertising and brand
development and a $1.1 million increase related to developing our territory partner network and support functions.
Additionally, there was a $1.1 million increase in compensation related costs and recruiting due to increased headcount in the
sales and marketing department. Commissions to our territory partners increased $0.3 million based on increased enrollments.
Year ended December 31, 2014 compared to year ended December 31, 2013. Sales and marketing expenses increased $2.5
million to $11.6 million for the year ended December 31, 2014, or 28%. The increase in sales and marketing expenses was
primarily due to an increase of $0.7 million in expenditures related to new and expanded online marketing initiatives, a $0.7
million increase in print advertising and brand development and a $0.6 million increase related to developing our territory
partner network. Additionally, compensation related costs increased $0.3 million due to increased headcount in the sales and
marketing department. Finally, commissions to our territory partners increased $0.2 million based on increased enrollments.
54
Technology and Development Expenses
Technology and development
Percentage of total revenue
Years Ended December 31,
2015
2014
2013
(in thousands, except percentages)
2015 to
2014 %
Change
2014 to
2013 %
Change
$
11,215
$
9,899
$
4,888
13%
103%
8%
9%
6%
Year ended December 31, 2015 compared to year ended December 31, 2014. Technology and development expenses increased
$1.3 million to $11.2 million for the year ended December 31, 2015 or 13%. This increase was partially due to a $0.4 million
increase related to infrastructure growth to support our growing business. Depreciation and amortization expense increased by
$0.6 million as new projects relating to prior years were placed into service in 2015. Additionally, there was a $0.2 million
increase in costs related to our direct pay initiative. Total expenses, net of capitalization, in technology related to our direct pay
claims processing initiative were $4.3 million in 2015 and $4.4 million in 2014. Of these amounts, depreciation expense
comprised $0.8 million in 2015 and $0.6 million in 2014.
Year ended December 31, 2014 compared to year ended December 31, 2013. Technology and development expenses increased
$5.0 million to $9.9 million for the year ended December 31, 2014, or 103%. The increase was primarily due to a $4.2 million
increase in compensation expense and related costs as a result of increased headcount as we made investments in new
technology infrastructure, and a $0.5 million increase in system hosting to support our infrastructure growth. In addition. $0.2
million of the total increase was due to software licenses and fees as a result of our company growth. Total expenses, net of
capitalization, in technology related to claims processing improvements were $4.4 million in 2014 and $1.4 million in 2013.
General and Administrative Expenses
General and administrative
Percentage of total revenue
Years Ended December 31,
2015
2014
2013
(in thousands, except percentages)
2015 to
2014 %
Change
2014 to
2013 %
Change
$
15,558
$
14,312
$
8,652
9%
65%
11%
12%
10%
Year ended December 31, 2015 compared to year ended December 31, 2014. General and administrative expenses increased
$1.2 million to $15.6 million for the year ended December 31, 2015, or 9%. The increase in general and administrative
expenses was primarily due to an increase in salaries and related expenses of $0.5 million resulting from increases in
headcount. Regulatory fees incurred in our normal course of business increased $0.4 million, and depreciation and amortization
increased $0.3 million due to property and equipment additions placed into service late in 2014.
Year ended December 31, 2014 compared to year ended December 31, 2013. General and administrative expenses increased
$5.7 million to $14.3 million for the year ended December 31, 2014, or 65%. The increase in general and administrative
expenses was primarily due to the recognition of stock-based compensation expense that was contingent upon our IPO of $1.4
million. Salaries and related expenses increased $1.8 million due to increased headcount to support our growth, transition to
being a public company and a severance agreement with a former employee. Additionally, regulatory expenses increased $0.5
million due to contingent regulatory matters and we incurred $0.8 million related to public company readiness activities.
55
Other (Income) Expense, Net
Years Ended December 31,
2015
2014
2013
Interest expense
Other (income) expense, net
Total other expense, net
$
$
325
(9)
316
$
6,726
(1,487)
5,239
$
$
609
671
1,280
(in thousands)
$
Year ended December 31, 2015 compared to year ended December 31, 2014. Other expense, net for the year ended
December 31, 2015 decreased $4.9 million to $0.3 million. This was primarily due to a decrease in interest expense associated
with the repayment of debt and the expensing of unamortized debt discounts associated with the repayment of debt in 2014,
partially offset by the revaluation of warrants classified as liabilities which resulted in other income in the prior year.
Year ended December 31, 2014 compared to year ended December 31, 2013. Other expenses, net for the year ended
December 31, 2014 increased $4.0 million to $5.2 million. This increase was primarily due to the expensing of unamortized
debt discounts associated with the repayment of debt, partially offset by income from the revaluation of warrants classified as
liabilities in our consolidated balance sheet during 2014.
56
Quarterly Results of Operations
The following tables set forth selected unaudited quarterly statements of operations data for the last eight fiscal quarters. The
unaudited interim financial statements for each of these quarters have been prepared on the same basis as the audited financial
statements included elsewhere in this prospectus and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present a fair statement of our results of operations and financial position for these
periods. This data should be read in conjunction with the audited consolidated financial statements and accompanying notes
included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results
for any future period.
In 2015, the prior period financial data and metrics have been recast to reflect the movement of pets from the subscription
business segment to the other business segment. Refer to “—Basis of Presentation” for further details.
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
(in thousands)
Three Months Ended
Consolidated Statements of
Operations Data:
Revenue:
Subscription business
$
36,722
$
34,420
$
32,208
$
30,056
$
28,617
$
27,112
$
24,912
$
22,861
3,479
40,201
29,856
3,075
32,931
6,866
404
7,270
3,445
37,865
28,145
3,129
31,274
6,274
317
6,591
3,379
35,587
26,661
3,140
29,801
5,547
239
5,786
3,254
33,310
24,766
2,962
27,728
5,290
292
5,582
3,251
31,868
23,456
2,888
26,344
5,161
363
5,524
3,200
30,312
23,051
2,816
25,867
4,061
384
4,445
3,178
28,090
20,273
2,667
22,940
4,639
511
5,150
2,779
25,640
18,388
2,496
20,884
4,473
283
4,756
3,919
4,128
3,533
3,651
3,218
2,934
2,810
2,646
2,533
3,798
10,250
(2,980)
26
(17)
3,005
4,067
11,200
(4,609)
14
4
2,879
3,996
10,408
(4,622)
40
(15)
2,798
3,697
10,146
(4,564)
245
19
2,614
3,850
9,682
2,532
4,385
9,851
2,553
3,292
8,655
2,200
2,786
7,632
(4,158)
(5,406)
(3,505)
(2,876)
103
58
5,155
(2,066)
(8,495)
14
726
(759)
736
1,286
(3,472)
(4,898)
7
15
Loss before income taxes
(2,989)
(4,627)
(4,647)
(4,828)
(4,319)
Income tax expense (benefit)
12
16
(22)
108
(43)
Net loss
$
(3,001) $
(4,643) $
(4,625) $
(4,936) $
(4,276) $
(8,509) $
(3,479) $
(4,913)
57
Other business
Total revenue
Cost of revenue:
Subscription business(1)
Other business
Total cost of revenue
Gross profit:
Subscription business
Other business
Total gross profit
Operating expenses:
Sales and marketing(1)
Technology and
development(1)
General and administrative(1)
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
Period Ended
Other Financial and
Operational Data(2):
Total pets enrolled
291,818
Total subscription pets enrolled
272,636
276,988
258,546
259,948
241,808
246,106
228,409
232,450
215,491
221,479
205,194
207,969
192,338
194,902
179,819
Monthly adjusted revenue per
pet(3)
Lifetime value of a pet
Average pet acquisition cost(4)
$
$
$
45.48
591
132
$
$
$
45.15
591
129
$
$
$
45.10
570
133
$
$
$
44.34
567
134
$
$
$
44.79
591
145
$
$
$
44.88
580
115
$
$
$
43.60
602
114
$
$
$
43.07
612
113
Average monthly retention
98.64%
98.66%
98.67%
98.66%
98.69%
98.67%
98.65%
98.65%
Adjusted EBITDA (in
thousands)(5)
$ (1,588)
$ (3,211)
$ (3,165)
$ (3,333)
$ (2,903)
$ (2,908)
$ (2,459)
$ (2,079)
(1) Includes stock-based compensation as follows:
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
(in thousands)
Three Months Ended
Cost of revenue
Sales and marketing
Technology and development
General and administrative
$
68
$
68
$
58
$
69
$
91
$
78
$
64
$
104
93
388
102
97
482
110
93
636
130
121
383
147
155
497
115
110
1,698
144
98
320
81
149
98
239
(2) For more information about how we calculate total subscription pets enrolled, monthly adjusted revenue per pet,
lifetime value of a pet, average pet acquisition cost and average monthly retention, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics.”
(3) Monthly adjusted revenue per pet is calculated in part based on adjusted revenue, a non-GAAP financial measure, that
we define as revenue from our subscription business segment excluding sign-up fee revenue and the change in deferred
revenue between periods. For more information about adjusted revenue and a reconciliation of revenue to adjusted
revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP
Financial Measures.”
(4) Average pet acquisition cost is calculated in part based on acquisition cost and net acquisition cost, non-GAAP financial
measures. Acquisition cost is defined as sales and marketing expenses, excluding stock-based compensation expense.
Net acquisition cost is defined as acquisition cost, net of sign-up fee revenue and other business segment sales and
marketing expense. For more information about acquisition cost, net acquisition cost and a reconciliation of sales and
marketing expenses to acquisition cost and net acquisition cost, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
(5) Adjusted EBITDA is a non-GAAP financial measure that we define as net loss excluding stock-based compensation
expense, depreciation and amortization expense, interest income, interest expense, change in fair value of warrant
liabilities and income tax expense (benefit). For more information about Adjusted EBITDA, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
58
Three Months Ended
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
(as a percentage of revenue)
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
82
18
10
6
9
25
(7)
—
—
(7)
—
83
17
11
8
11
30
(12)
—
—
(12)
—
84
16
10
8
11
29
(13)
—
—
(13)
—
83
17
11
8
11
30
(14)
1
—
(14)
—
83
17
10
8
12
30
(13)
—
—
(13)
—
85
15
10
8
14
32
(18)
17
(7)
(28)
—
82
18
10
9
12
31
(12)
3
(3)
(12)
—
81
19
10
9
11
30
(11)
3
5
(19)
—
(7)%
(12)%
(13)%
(15)%
(13)%
(28)%
(12)%
(19)%
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Technology and
development
General and
administrative
Total operating
expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax expense
(benefit)
Net loss
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
(as a percentage of subscription revenue)
Three Months Ended
Subscription business
revenue
Subscription business
cost of revenue
Subscription business
gross profit
100%
100%
100%
100%
100%
100%
100%
100%
81
82
83
82
82
85
81
80
19%
18%
17%
18%
18%
15%
19%
20%
Liquidity and Capital Resources
Since inception, we have financed our operations and met capital requirements primarily through the sale of equity securities
and from borrowings. Our principal uses of cash are paying claims, funding operations and capital requirements, investing in
new member acquisition, enhancements to our member experience and servicing debt. In July 2014, we closed our IPO,
pursuant to which we sold 8,193,750 shares of common stock at an offering price of $10.00 per share. We received net
proceeds of approximately $72.8 million.
59
Sources of Funds
As of December 31, 2015, we had $43.2 million of cash and cash equivalents and short-term investments and $18.4 million
available under our line of credit which excludes $1.6 million reserved under the credit agreement for an outstanding letter of
credit and other ancillary services. We believe that our existing cash and cash equivalents, short-term investments and line of
credit will be sufficient to fund our operations and statutory capital requirements for at least the next 12 months. From time to
time, we may explore additional financing, which could include equity, equity-linked and debt financing. However, there can
be no assurance that any additional financing will be available to us on acceptable terms, or at all.
Cash and investments held by our insurance subsidiaries, American Pet Insurance Company (APIC) and Wyndham Insurance
Company (SAC) Limited (WICL) Segregated Account AX, are subject to certain capital and dividend rules and regulations as
applicable within the jurisdictions in which they are authorized to operate. For more information on this change, see “—
Regulation”.
Long-Term Debt
Square 1 Bank Loan and Security Agreement
In April 2007, we entered into a loan and security agreement with Square 1 Bank (Square 1), which we amended and restated in
August 2012 and most recently amended in December 2014. We refer to this amended and restated loan and security agreement
as our Square 1 credit facility. The Square 1 credit facility provides for a revolving line of credit, under which we may take
advances up to $20.0 million. The maximum amount for borrowing under the Square 1 credit facility, inclusive of any amounts
outstanding under the revolving line of credit and the term loan, is the lesser of $20.0 million or the total amount of cash and
securities held by our subsidiary, American Pet Insurance Company, less up to $1.6 million for obligations we may have
outstanding from Square 1 for other ancillary services, including our $1.1 million letter of credit.
Interest on the revolving line of credit accrues at a variable annual rate equal to the greater of 5.0% or 1.5% plus the prime rate.
The revolving line of credit matures in July 2017, at which time it will need to be renewed or all amounts outstanding under it,
including accrued interest, will become immediately due and payable.
The Square 1 credit facility requires us to maintain certain financial covenants, including having APIC maintain statutory
capital and surplus at all times of not less than the greater of $1.6 million or 110% of the highest amount of statutory capital
and surplus required in any state in which APIC is licensed, maintaining a minimum cash balance of $1.6 million in our
accounts at Square 1 (including for such purposes, APIC’s cash and depository products at Square 1), achieving certain
monthly revenue and remaining within certain maximum EBITDA loss levels. EBITDA is defined for such purposes as
earnings, plus an amount equal to the sum of (i) tax, plus (ii) depreciation and amortization, plus (iii) interest and non-cash
expenses, plus (iv) any non-cash stock compensation expense, less (a) any increase in capitalized expenditures from the prior
period, plus (b) any increase in capitalized software from the prior period, plus (c) any increase in deferred acquisition costs
from the prior period.
The Square 1 credit facility also requires us to maintain certain non-financial covenants, including those that restrict our ability
to dispose of our assets, change the name, location, office or executive management of our business, merge with or acquire
other entities, incur other indebtedness, incur encumbrances, pay dividends or make distributions to holders of our capital
stock, make investments, engage in transactions with our affiliates, permit withdrawals from APIC (with certain exceptions)
and conduct operations in certain of our Canadian subsidiaries. As of December 31, 2015, we were in compliance with each of
the financial and non-financial covenants.
Our obligations under the Square 1 credit facility are secured by substantially all of our assets and a pledge of certain of our
subsidiaries’ stock. As of December 31, 2015, we had no aggregate borrowings outstanding and under the Square 1 credit
facility.
Regulation
As of December 31, 2015, our insurance entities, APIC and Wyndham Insurance Company (SAC) Limited (WICL) Segregated
Account AX, held $27.7 million in investments and $9.8 million in other current assets, including $1.7 million held in cash and
cash equivalents to be used for operating expenses of our insurance subsidiaries. Most of the assets in APIC and WILC
Segregated Account AX are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which
they are authorized to operate. As of December 31, 2015, total assets and liabilities held outside our insurance entities totaled
$33.5 million and $7.8 million, respectively, including $9.8 million of cash and cash equivalents that are segregated from other
operating funds and are held in trust for the payment of claims on behalf of our insurance subsidiaries.
60
To comply with these regulations and contractual obligations of APIC and WICL Segregated Account AX, we may be required
to maintain capital that we would otherwise invest in our growth and operations, which may require us to modify our operating
plan or marketing initiatives, delay the implementation of new solutions or development of new technologies, decrease the rate
at which we hire additional personnel and enter into relationships with Territory Partners, incur indebtedness or pursue equity
or debt financings or otherwise modify our business operations.
APIC
The majority of our investments are held by our insurance entities to satisfy risk-based capital requirements of the National
Association of Insurance Commissioners (NAIC). The NAIC requirements provide a method for analyzing the minimum
amount of risk-based capital (statutory capital and surplus plus other adjustments) appropriate for an insurance company to
support its overall business operations, taking into account the risk characteristics of the company’s assets, liabilities and
certain other items. An insurance company found to have insufficient statutory capital based on its risk-based capital ratio may
be subject to varying levels of additional regulatory oversight depending on the level of capital inadequacy. APIC must hold
certain capital amounts in order to comply with the statutory regulations and, therefore, we cannot use these amounts for
general operating purposes without regulatory approval. As our business grows, the amount of capital we are required to
maintain to satisfy our risk-based capital requirements may increase significantly. As of December 31, 2015, APIC was
required to maintain at least $24.5 million of risk-based capital to avoid this additional regulatory oversight. As of that date,
APIC maintained $26.1 million of risk-based capital. The NY DFS may increase the required levels of risk-based capital in the
future, and we anticipate that we will need to maintain greater amounts of risk-based capital if our pet enrollment continues to
grow.
New York laws also restrict the ability of APIC to pay dividends to our parent holding company. The dividend restrictions are
based in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered
ordinary and may be paid without prior approval. In general, dividends or distributions that, in the aggregate in any 12-month
period exceed the lesser of (i) 10% of surplus as of the preceding December 31 or (ii) the insurer’s adjusted net investment
income for such 12-month period ended the preceding December 31, not including realized capital gains, are subject to
approval by regulatory authorities. As of December 31, 2015, less than $0.1 million was able to be paid in the form of a
dividend from APIC to our parent holding company without prior approval from regulatory authorities.
WICL Segregated Account AX
WICL Segregated Account AX was established by WICL, with Trupanion, Inc. as the shareholder, to enter into a reinsurance
agreement with Omega General Insurance Company. All of the assets and liabilities of WICL Segregated Account AX are
legally segregated from other assets and liabilities within WICL and all shares of the segregated account are owned by
Trupanion, Inc. Our agreements with WICL do not allow dividends to be paid to our parent company until 2017 or later. As
required by the Office of the Superintendent of Financial institutions regulations related to our reinsurance agreement with
Omega General Insurance Company, we were required to fund a Canadian Trust account with the greater of CAD $2 million or
115% of unearned Canadian premium plus 15% of outstanding Canadian claims, including all incurred by not reported claims.
Additionally, WICL required initial capital of CAD $1.3 million. During January 2015, we funded CAD $3.3 million to
initially satisfy these requirements.
Though we are not directly regulated by the Bermuda Monetary Authority (BMA), WICL’s regulation and compliance impacts
us as it could have an adverse impact on the ability of Segregated Account AX to pay dividends. WICL is regulated by the
BMA under the Insurance Act of 1978 (Insurance Act) and the Segregated Accounts Company Act of 2000. The Insurance Act
imposes on Bermuda insurance companies, solvency and liquidity standards, certain restrictions on the declaration and payment
of dividends and distributions, certain restrictions on the reduction of statutory capital, and auditing and reporting requirements,
and grants BMA the powers to supervise and, in certain circumstances, to investigate and intervene in the affairs of insurance
companies. Under the Insurance Act, WICL as a class 3 insurer is required to maintain available statutory capital and surplus at
a level equal to or in excess of a prescribed minimum established by reference to net written premiums and loss reserves.
Under the Bermuda Companies Act of 1981, as amended, a Bermuda company may not declare or pay a dividend or make a
distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the
payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby
be less than its liabilities. The Segregated Accounts Company Act of 2000 further requires that dividends out of a segregated
account can only be paid to the extent that the cell remains solvent and the value of its assets remain greater than the aggregate
of its liabilities and its issued share capital and share premium accounts.
61
Investments
As of December 31, 2015, we had $27.7 million of short-term and long-term investments in our insurance entities. These
investments are held to satisfy statutory requirements and support operating needs. The majority of our investments are highly
rated U.S. treasury securities, certificates of deposit, and U.S. government funds. In addition we have one investment in a
municipal bond which is insured by a third-party insurance company with a rating of “A2” with Moody’s. The unused proceeds
from our IPO are currently held primarily in money market funds.
Historical Cash Flow Trends
The following table shows a summary of our cash flows for the periods indicated (in thousands):
Net cash used in operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rates on cash
Net change in cash and cash equivalents
Operating Cash Flows
Years Ended December 31,
2015
2014
2013
$
$
(10,425) $
(9,923)
(14,208)
(586)
(35,142) $
(10,801) $
(11,926)
60,863
23
(1,023)
(5,997)
17,551
174
38,159
$
10,705
We derive operating cash flows from cash collected from the sale of subscriptions to our medical plan, which is used to pay
claims, other cost of revenue and fixed expenses. Additionally, cash is used to support the growth of our business by reinvesting
in sales and marketing to acquire new pets and projects to improve the member experience, including our substantial
investment in our Trupanion ExpressTM software.
Net cash used in operating activities for the year ended December 31, 2015 consisted of our net loss of $17.2 million reduced
by non-cash expenses, including stock-based compensation of $3.0 million and depreciation and amortization of $2.5 million
and a $1.3 million change in operating assets, which were primarily driven by an increase in claims paid, increased spend on
marketing and technology initiatives, increased payables due to timing of payments, as well as an increase in prepaid assets due
to prepayments made for benefits and a new billing system. These increases in cash used in operating activities were partially
offset by increased revenue due to enrollment growth and higher monthly adjusted revenue per pet.
Net cash used in operating activities for 2014 consisted of our net loss of $21.2 million reduced by non-cash expenses,
including stock-based compensation of $4.1 million and the amortization of the debt discount of $5.0 million as well as
changes in our operating assets and liabilities of $1.1 million, which were primarily driven by an increase in claims paid,
increased spend on marketing and technology initiatives, as well as an increase in prepaid assets due to advance payment
insurance. These increases in cash used in operating activities were partially offset by increased revenue due to enrollment
growth and higher adjusted revenue per pet.
Net cash used in operating activities for 2013 consisted of our net loss of $8.2 million and changes in our operating assets and
liabilities of $3.6 million, which were primarily driven by increased receivables related to writing policies for an unaffiliated
managing general agent, which began in November 2012 and increased until November 2013 as the unaffiliated managing
general agent transitioned its business from the company that previously wrote its policies. This was partially offset by non-
cash expense items including stock-based compensation of $1.9 million, depreciation and amortization of $0.9 million and
expense relating to the remeasurement of warrant liabilities to fair value of $0.5 million.
Investing Cash Flows
Net cash used in investing activities for each of the periods presented was primarily related to the net purchase of investments
to increase our statutory capital. We expect to continue increasing our statutory capital as we expand our operations. In
addition, we made investments in software to be used internally for our technology initiatives and purchased other fixed assets
related to our operations.
Financing Cash Flows
Historically, we have funded our operations through the issuance of common and preferred stock and the incurrence of
indebtedness. In July 2014, we completed our IPO, pursuant to which we sold 8,193,750 shares of common stock at an offering
price of $10.00 per share.
62
For the year ended December 31, 2015, net cash (used in) financing activities primarily consisted of debt repayments of $14.9
million. In addition, we received $1.3 million in proceeds from the exercise of stock options.
For 2014, net cash provided by financing activities included the net proceeds from our IPO of $72.8 million, debt financing of
$17.0 million and the release of restricted cash of $3.0 million. Net cash used in financing activities consisted primarily of debt
repayments of $32.0 million.
For 2013, net cash provided by financing activities consisted of the incurrence of an aggregate of $20.0 million of borrowings
under our revolving line of credit and term loans. Of this amount, $3.0 million was designated as restricted cash at December
31, 2013. In addition, we received $0.6 million in proceeds from the exercise of stock options.
Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations
and non-cancellable operating leases. Our contractual cash obligations as of December 31, 2015 are set forth below (in
thousands):
Operating lease obligations
Strategic marketing and service provider
agreements
Other obligations
Total
21,466
1,835
1,832
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
1,407
1,316
759
3,389
4,175
12,495
401
706
101
367
17
—
Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which
have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities,
revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on
various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results
may differ from these estimates.
Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial
condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of
the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and
estimates include those related to:
•
•
•
stock-based compensation;
income taxes; and
claims reserve.
Stock-Based Compensation and Warrant Liabilities
Compensation expense related to stock-based transactions, including employee and non-employee stock option awards, and
restricted stock awards and units, is measured and recognized in the financial statements based on fair value. The fair value of
each option award is estimated on the grant date using the Black-Scholes-Merton option-pricing model. All of our stock-based
awards have been for instruments tied to our common stock. The stock-based compensation expense, net of estimated
forfeitures, is recognized on a straight-line basis over the requisite service periods of the awards, which are generally four
years. Many factors are considered when estimating forfeitures, including types of awards, employee class and historical
experience.
Key assumptions. Our Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions,
including the fair value of the underlying stock, the expected volatility of the price of our stock, the expected term of the
option, risk-free interest rates and the expected dividend yield of our stock. These estimates involve inherent uncertainties and
the application of management’s judgment. If factors change and different assumptions are used, our stock-based expense could
be materially different in the future. These assumptions are estimated as follows:
• Expected volatility—As we do not have a significant trading history for our common stock, the expected stock price
volatility for our common stock was estimated by taking the average historic price volatility for identified peers based
on daily price observations over a period equivalent to the expected term of the stock option grants and warrant
issuances. We did not rely on implied volatilities of traded options or warrants in our industry peers’ common stock
63
because the volume of activity was relatively low. We intend to continue to consistently apply this process using the
same or similar public companies until a sufficient amount of historical information regarding the volatility of our own
share price becomes available.
• Expected term—The expected term represents the period that our stock-based awards are expected to be outstanding.
As we do not have sufficient historical experience for determining the expected term of the stock-based awards
granted, we have based our expected term for awards issued to employees on the simplified method, which represents
the average period from vesting to the expiration of the stock option.
• Risk-free interest rate—The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities
similar to the expected term of the options.
• Expected dividend yield—We have never declared or paid any cash dividends and do not presently plan to pay cash
dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
In addition to the assumptions used in the Black-Scholes-Merton option-pricing model, the amount of stock option expense we
recognize in our consolidated statements of operations includes an estimate of stock option forfeitures. Estimated forfeitures
did not have a material impact on our assumptions in 2015, 2014 or 2013.
Income Taxes
We use the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect
when such assets and liabilities are recovered or settled. We determine deferred tax assets including net operating losses
(NOLs) and liabilities, based on temporary differences between the book and tax bases of assets and liabilities. We believe that
it is currently more likely than not that our deferred tax assets will not be realized, and as such, a full valuation allowance is
required. In addition, utilization of NOLs and credits to offset future income subject to taxes may be subject to substantial
annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986, and similar state
provisions. We have not performed a significant analysis to determine whether a qualifying change in ownership that would
limit the utilization of our NOLs has taken place.
Claims Reserve
Our claims reserve represents estimated claims and claim settlement costs with respect to covered claims that have occurred as
of the balance sheet date. The liabilities for claims and claim adjustment expenses are recorded at the estimated ultimate
payment amounts. Estimated ultimate payment amounts are based upon a number of factors, including claims information
received from members and estimates of incurred but not reported claims. Historical claims data as well as expected
developments in the industry, internal claims adjustment expense forecasts, and the economy as a whole are considered by our
team of pet medical insurance actuaries when developing our claims reserve.
In establishing estimates for these factors, we must make various assumptions regarding frequency and severity of claims,
length of time to achieve ultimate settlement of claims, estimated deductible applicable to incurred claims, and changes in the
cost of veterinary care. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported
claims, our actual liabilities may be different from our original estimates. On a monthly basis, we review our reserve for claims
and claims settlement costs to determine whether further adjustments are required. Any resulting adjustments are included in
the current period’s results.
As of December 31, 2015 and 2014, our reserve for claims incurred but not yet reported was $6.3 million and $5.1 million,
respectively. We believe the amount of our claims reserve as of December 31, 2015 is adequate and we do not believe that there
are any reasonably likely changes in the facts or circumstances underlying key assumptions that would result in the reserve for
claims being insufficient in an amount that would have a material impact on our reported results, financial position or liquidity.
The ultimate liability, however, may be in excess of or less than the amount we have reserved. During 2015, 2014 and 2013, we
experienced actual claims that were below our estimate for prior year reserves by less than $0.1 million, $0.5 million and $0.1
million, respectively. Historically, approximately 95% of claims have been settled within three months of the claim date.
64
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to various market risks, including the risks inherent in our insurance business and changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates and prices.
Interest Rate Risk
The principal market risk we face is interest rate risk. We had cash and cash equivalents of $18.0 million and $27.7 million in
investments as of December 31, 2015, which consisted of both highly-liquid investments with an original maturity of twelve
months or less and long-term low-risk investments. We believe that we do not have significant exposure to changes in the fair
value of these assets as a result of changes in interest rates due to the short-term nature of most of our investments coupled with
the security behind our long-term investments. Historically, our investment income has not been a material part of our
operations.
Foreign Currency Exchange Risk
We generate a significant portion of our revenue in Canada. In 2015, our Canadian operations accounted for 21% of our
revenue. Our revenue and expenses are generally denominated in the currencies in which our operations are located, which are
the United States and Canada. As our operations in Canada or the United States grow on an absolute basis and/or relative to one
another, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange
rates.
Upon consolidation, as exchange rates vary, revenues and other operating results may differ materially from expectations. For
example, had the average 2014 Canadian currency exchange rate remained consistent into 2015, Canadian revenues would
have been $4.8 million higher after the foreign currency conversion. Our analysis of operating results transacted in Canadian
currency indicated that a hypothetical 10% change in the Canadian currency exchange rate could have increased or decreased
our total revenues by approximately $3.0 million for the year ended December 31, 2015. To date, we have not entered into any
material foreign currency hedging contracts although we may do so in the future.
65
Item 8. Financial Statements and Supplementary Data
Trupanion Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Balance Sheets
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
67
68
69
70
71
72
73
66
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Trupanion, Inc.
We have audited the accompanying consolidated balance sheets of Trupanion, Inc. as of December 31, 2015 and 2014, and the
related consolidated statements of operations, comprehensive loss, changes in redeemable convertible preferred stock and
stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2015. Our audits
also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Trupanion, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Seattle, Washington
February 16, 2016
67
Trupanion, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share data)
Revenue
Cost of revenue:
Claims expenses
Other cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Technology and development
General and administrative
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average shares used to compute net loss per share attributable to
common stockholders:
Years Ended December 31,
2015
146,963
$
2014
115,910
$
2013
$
83,829
103,324
18,410
25,229
15,231
11,215
15,558
42,004
(16,775)
325
(9)
(17,091)
114
(17,205) $
79,913
16,123
19,874
11,608
9,899
14,312
35,819
(15,945)
6,726
(1,487)
(21,184)
(7)
(21,177) $
56,637
11,548
15,644
9,091
4,888
8,652
22,631
(6,987)
609
671
(8,267)
(92)
(8,175)
(0.62) $
(1.64) $
(6.23)
$
$
Basic and diluted
27,638,443
12,934,477
1,312,019
68
Trupanion, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Net loss
Other comprehensive (loss) income:
Foreign currency translation adjustments
Change in unrealized losses on available-for-sale securities
Other comprehensive (loss) income, net of taxes
Comprehensive loss
Years Ended December 31,
2015
2014
2013
$
(17,205) $
(21,177) $
(8,175)
(517)
4
(513)
(17,718) $
65
110
175
(21,002) $
$
85
(107)
(22)
(8,197)
69
Years Ended December 31,
2015
2014
$
$
$
17,956
25,288
8,196
2,193
53,633
2,388
300
9,719
4,854
23
70,917
1,289
4,189
6,274
11,042
169
654
23,617
—
1,433
511
25,561
53,098
22,371
7,887
1,299
84,655
942
—
7,862
4,847
—
98,306
1,962
4,607
5,107
9,345
124
1,399
22,544
14,900
1,495
92
39,031
—
—
—
122,844
(502)
(74,385)
(2,601)
45,356
70,917
$
—
119,045
11
(57,180)
(2,601)
59,275
98,306
$
$
$
$
Trupanion, Inc.
Consolidated Balance Sheets
(in thousands, except for share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts and other receivables
Prepaid expenses and other assets
Total current assets
Long-term investments, at fair value
Equity method investment
Property and equipment, net
Intangible assets, net
Other long term assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued liabilities
Claims reserve
Deferred revenue
Deferred tax liabilities
Other payables
Total current liabilities
Long-term debt
Deferred tax liabilities
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.00001 par value per share, 200,000,000 shares authorized at December 31,
2015 and December 31, 2014, 29,017,168 and 28,396,189 issued and outstanding at December
31, 2015; 28,451,920 and 27,830,941 shares issued and outstanding at December 31, 2014.
Preferred stock: $0.00001 par value per share, 10,000,000 authorized at December 31, 2015 and
December 31, 2014, and 0 issued and outstanding at December 31, 2015 and December 31, 2014.
Additional paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Treasury stock, at cost: 620,979 shares at December 31, 2015 and December 31, 2014.
Total stockholders’ equity
Total liabilities and stockholders’ equity
70
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N
Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to cash used in operating activities:
Years Ended December 31,
2015
2014
2013
$
(17,205) $
(21,177) $
(8,175)
Depreciation and amortization
Amortization of debt discount and prepaid loan fees
Warrant (income) expense
Stock-based compensation expense
Other
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Accounts payable
Accrued liabilities
Claims reserve
Deferred revenue
Other payables
Net cash used in operating activities
Investing activities
Purchases of investment securities
Maturities of investment securities
Purchases of property and equipment
Equity method investment
Other
Net cash used in investing activities
Financing activities
Restricted cash
Tax withholding on restricted stock
Proceeds from exercise of stock options
Repayment of debt financing
Other financing costs
Net proceeds from IPO
Net cash (used in) provided by financing activities
Effect of foreign exchange rates on cash, net
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures
Income taxes paid
Interest paid
Noncash investing and financing activities:
Warrants issued in conjunction with debt issuance
Exchange of stock for equity method investment
Increase in payables for property and equipment
Cashless exercise of preferred stock warrants
Common stock warrant reclassification to equity
$
2,542
21
—
3,002
(89)
(328)
(905)
(347)
51
1,241
1,779
(187)
(10,425)
(24,800)
20,180
(4,894)
(300)
(109)
(9,923)
—
(643)
1,335
(14,900)
—
—
(14,208)
(586)
(35,142)
53,098
17,956
(139)
(155)
—
—
98
—
—
$
1,674
5,033
(1,574)
4,084
57
(126)
(369)
449
551
(505)
877
225
(10,801)
(34,894)
28,601
(5,633)
—
—
(11,926)
3,000
—
211
(15,000)
(103)
72,755
60,863
23
38,159
14,939
53,098
(9)
(1,494)
1,124
—
911
1,270
3,180
$
892
36
543
1,938
112
(5,478)
(22)
242
1,258
3,031
4,529
71
(1,023)
(26,064)
20,770
(1,473)
—
770
(5,997)
(3,000)
—
607
20,000
(56)
—
17,551
174
10,705
4,234
14,939
—
(642)
3,806
448
134
—
—
72
Trupanion, Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Description of Business
The Company provides medical insurance plans for cats and dogs throughout the United States, Canada and Puerto Rico. The
Company’s data-driven, vertically-integrated approach enables us to provide pet owners with what we believe is the highest
value medical plan for their pets, priced specifically for each pet’s unique characteristics. We strive to operate the business
similar to other subscription-based businesses, with a focus on maximizing the lifetime value of each pet while sustaining a
favorable ratio of lifetime value relative to acquisition cost.
Reclassifications
Certain prior year amounts have been reclassified within the Company’s consolidated financial statements from their original
presentation to conform with the current period presentation. In addition, amounts in note 13 related to segments have been
recast to reflect a change in the composition of Company’s segments as described in note 13.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies and the reported
amounts of revenue and expenses. Significant items subject to such estimates and assumptions include the valuation of deferred
tax assets, stock-based compensation, claims reserve, useful lives of software developed for internal use and income tax
uncertainties. Actual results could differ from the estimates used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash
equivalents. At times, cash on deposit may be in excess of the applicable federal deposit insurance corporation limits.
Accounts and Other Receivable
Receivables are comprised of trade receivables and other miscellaneous receivables. As of December 31, 2015 and 2014,
receivables included $7.2 million and $6.8 million, respectively, for one-year policies written by an unaffiliated general agent.
No single customer made up more than 5% of accounts receivable as of December 31, 2015 or 2014.
73
Deferred Acquisition Costs
The Company incurs certain costs related to the successful acquisition of new and renewal customer contracts, which are
capitalized. These costs include premium taxes, commissions, and referral fees that directly relate to the successful acquisition
of new or renewal customer contracts. Deferred acquisition costs are included in prepaid expenses and other assets on the
consolidated balance sheet and are amortized over the related policy term to the applicable financial statement line item,
including sales and marketing expenses and other cost of revenue. Total deferred acquisition costs for the years ended
December 31, 2015, 2014 and 2013 are summarized below (in thousands):
Deferred acquisition costs capitalized
Deferred acquisition costs amortized:
Sales and marketing
Other cost of revenue
Total amortization
Balance at December 31,
Investments
Years Ended December 31,
2015
2014
2013
$
10,184
$
7,995
$
5,919
1,490
8,606
10,096
557
$
$
858
7,052
7,910
469
$
663
5,082
5,745
384
The Company recognizes the following classifications of investments:
Short-term-investments—Investments with an initial maturity of less than one year are reported at amortized cost, which
approximates fair value.
Available-for-Sale—Investments in fixed maturities not classified as short-term-investments are reported at fair value,
and the temporary declines or increases from amortized cost are included as a component of other comprehensive income.
Available-for-sale securities are classified based upon the availability to be used in current operations.
Premiums and discounts on fixed maturity securities are amortized or accreted over the life of the security. Such amortization
expense and accretion is included in interest income. Interest income is recognized in other (income) expense, net when earned.
A decline in the fair value of any available-for-sale security below amortized cost that is deemed to be other than temporary
results in an impairment to reduce the amortized cost to fair value or recovery value. To determine whether an impairment is
other than temporary, the Company considers its intent to sell the security, intent and ability to hold the security, as well as all
available information relevant to the collectability of the security, including past events, current conditions, and reasonable and
supportable forecasts, when developing estimates of cash flows expected to be collected. Realized capital gains and losses are
determined on a specific identification basis and recorded as a part of other expense, net in the statement of operations.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets ranging from three to five years. Leasehold improvements are depreciated over the less of their expected
useful life or the remaining term of the related lease.
Costs related to software developed for internal use are primarily related to the Company’s website, internal support systems,
and proprietary billing and claims systems. Costs are capitalized during the application development stage of the project and
amortized on a straight-line basis over the estimated useful lives of the related assets, estimated between three and five years,
once the software is placed into service.
Intangible Assets
Indefinite-lived intangible assets, which are not amortized, are assessed for impairment at least annually and more frequently if
circumstances indicate a possible impairment. The Company first performs a qualitative analysis to assess whether it is more
likely than not the asset is impaired and, if necessary, a quantitative analysis is performed to measure impairment.
Assets with finite lives are amortized over their estimated remaining useful life.
74
Asset Impairment
Long-lived assets, such as property and equipment and definite lived intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of
the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the
extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including
discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
Claims Reserve
The claims reserve includes unpaid claims and claims adjustment expenses, which includes an estimate, based on past
experience, for claims incurred but not reported. Such liabilities are necessarily based on assumptions and estimates, and while
management believes the amount is adequate, the ultimate liability may be in excess of or less than the amount provided. The
methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are
reflected in the period in which they become known.
Warrants
The Company issued warrants to purchase common or convertible preferred stock to third parties as a part of certain business
and financing transactions. The Company values warrants using the Black-Scholes-Merton option-pricing model. Certain
warrants were considered liability awards and were remeasured each reporting period until exercised, settled or reclassified to
stockholders’ equity. See Note 12 for additional information.
Revenue Recognition
The Company generates revenue primarily from subscription fees for its medical insurance plan and other policies the
Company writes, which is earned pro rata over the terms of the customer contracts.
No single customer accounted for more than 5% of the Company’s revenue in 2015, 2014 or 2013.
Claims Expense
Claims expenses include claims incurred, the cost of personnel administering the claims and providing customer service related
to claims, and other operating expenses directly or indirectly related to claims administration.
Other Cost of Revenue
Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, renewal
fees, credit card transaction fees and premium tax expenses. Other cost of revenue for the other business segment includes the
commission the Company pays to the unaffiliated general agent and premium taxes on other policies in this segment.
Sales and Marketing
Sales and marketing expenses consist of costs to educate veterinarians and policy holders about the Company’s policy,
converting leads to enrolled pets, print, online and promotional advertising costs and employee compensation and related costs.
Technology and Development
Technology and development expenses consist primarily of personnel costs and related expenses for the Company’s operations
staff, which includes information technology development and infrastructure support, third-party services and depreciation of
hardware and amortization of capitalized software and intangible assets.
General and Administrative
General and administrative expenses consist primarily of personnel costs and related expenses for the Company’s finance,
actuarial, human resources, business development and general management functions, as well as facilities and professional
services.
75
Other (Income) Expense, Net
Other (income) expense, net was comprised of the following (in thousands):
Interest income
Foreign exchange gain
Loss on disposal of fixed assets
Warrant remeasurement
Other
Other (income) expense, net
Insurance Operations
Years Ended December 31,
2015
2014
2013
(75) $
36
20
—
10
(9) $
(73) $
41
111
(1,574)
8
(1,487) $
(86)
76
44
543
94
671
$
$
Effective January 1, 2015, the Company formed a segregated account in Bermuda as part of Wyndham Insurance Company
(SAC) Limited (WICL), and entered into a revised fronting and reinsurance arrangement with Omega General Insurance
Company (Omega) to include its newly formed segregated account. The Company maintains all risk with the business written
in Canada and consolidates the entity in its financial statements. Contractual requirements restrict dividends from this entity
until after 2016, at which time dividends will be allowed subject to the Segregated Accounts Company Act of 2000, which
allows for dividends only to the extent that the entity remains solvent and the value of its assets remain greater than the
aggregate of its liabilities and its issued share capital and share premium accounts. WICL required the Company to invest initial
capital of CAD $1.3 million.
For the Company’s Canadian business, all plans are written by Omega General Insurance Company (Omega) and the risk is
assumed by the Company through a fronting and reinsurance agreement. Premiums are recognized and earned pro rata over the
terms of the related customer contracts. Premiums recognized from the agreement in 2015, 2014 and 2013 were $30.9 million,
$29.1 million and $24.7 million, respectively and deferred revenue relating to this arrangement at December 31, 2015 and 2014
was $0.9 million and $0.9 million, respectively. Reinsurance revenue was 21%, 25% and 29% of total revenue in 2015, 2014
and 2013, respectively. Cash designated for the purpose of paying claims related to this reinsurance agreement was $2.0 million
and $1.7 million at December 31, 2015 and 2014, respectively. As required by the Office of the Superintendent of Financial
institutions regulations related to the Company’s reinsurance agreement with Omega General Insurance Company, the
Company is required to fund a Canadian Trust account with the greater of CAD $2.0 million or 115% of unearned Canadian
premium plus 15% of outstanding Canadian claims, including all incurred by not reported claims.
The Company has not transferred any risk to third-party reinsurers.
In November 2012, the Company began writing one-year pet insurance policies for an unaffiliated general agent. Revenue
during 2015, 2014 and 2013 totaled $9.9 million, $10.0 million and $7.0 million, respectively, and deferred revenue relating to
this arrangement at December 31, 2015 and 2014 was $5.5 million and $5.1 million, respectively.
Advertising
Advertising costs are expensed as incurred, with the exception of television advertisements, which are expensed for the first
time each advertisement is aired. Advertising costs amounted to $5.3 million, $3.2 million and $0.7 million, in 2015, 2014 and
2013, respectively.
Stock-Based Compensation
The Company measures compensation expense for stock-based transactions to employees at fair value on the date of grant and
recognizes such cost, on a straight-line basis over the requisite service period (generally four years) net of estimated forfeitures,
except for the restricted stock with a performance condition which is measured on graded and vesting schedule. Many factors
are considered when estimating forfeitures, including types of awards, employee class and historical experience. Stock options
are valued using the Black-Scholes-Merton option-pricing model. The fair value of restricted stock units (RSUs) and restricted
stock awards is based on the fair value of the Company’s stock on the date of the grant.
The Company measures compensation cost for stock-based compensation to non-employees at fair value and remeasures the
award each period until the award vests.
76
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Valuation allowances are provided for when it is considered more likely than not that deferred tax
assets will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest amount that is greater than a 50% likelihood of being realized.
Penalties and interest are classified as a component of income taxes.
Foreign Currency
The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries
with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date.
Revenue and expenses for each subsidiary are translated to U.S. dollars using a weighted-average rate for the relevant reporting
period. Translation adjustments resulting from this process are included in accumulated other comprehensive loss, and totaled
$0.4 million as of December 31, 2015. Gains and losses that arise from exchange rate fluctuations for monetary asset and
liability balances that are not denominated in an entity’s functional currency are included within other income.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash
equivalents, investments and accounts receivable. The Company manages its risk by investing cash equivalents and investment
securities in money market instruments and securities of the U.S. government, U.S. government agencies and high-credit-
quality issuers of debt securities.
Credit risk with respect to accounts receivable is dispersed due to the large number of customers. In addition, the Company’s
credit risk is mitigated by the relatively short collection period.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) amending
revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Insurance contracts
are excluded from the scope of this new guidance. The guidance is effective for annual and interim reporting periods beginning
after December 15, 2017, with early adoption permitted, and must be applied retrospectively or modified retrospectively. The
Company does not believe this ASU will have a material impact on its consolidated financial statements.
In May 2015, the FASB issued an ASU amending short-term insurance contract disclosures and requiring more detailed
disclosures to enable users of financial statements to understand information relating to liabilities for unpaid claims and claims
adjustment expenses. Additionally, the amendments will also require insurance entities to disclose information about
significant changes in methodologies and assumptions used to calculate these liabilities. This guidance is effective for annual
reporting periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. Early adoption
of this guidance is permitted, and must be applied retrospectively by providing comparative disclosures for each period
presented. The Company plans to adopt this guidance as of December 31, 2016.
In November 2015, the FASB issued an ASU amending the accounting for income taxes and requiring all deferred tax assets
and liabilities to be classified as non-current on the consolidated balance sheet. The ASU is effective for reporting periods
beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or
retrospectively. The Company plans to adopt this guidance as of December 31, 2016.
2. Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock
outstanding for the period. Excluded from the weighted-average number of shares outstanding are shares that have been issued
and are subject to future vesting and unvested restricted stock. Diluted net loss per share is calculated by dividing the net loss
by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock
method. Potentially dilutive common stock equivalents are comprised of convertible preferred stock and common stock,
77
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:
Stock options
Restricted stock awards and units
Warrants
Series A convertible preferred stock
Series B convertible preferred stock
Series C convertible preferred stock
Exchangeable shares
As of December 31,
2015
4,871,949
472,384
869,999
2014
5,112,556
592,625
869,999
—
—
—
—
—
—
—
—
2013
4,663,445
722,226
884,111
7,466,283
3,546,384
3,845,322
2,247,130
Convertible preferred stock is presented on an as converted basis to reflect the applicable conversion ratio at December 31,
2013.
3. Property and Equipment, Net
Property and equipment, along with their useful lives, were as follows for the years ended December 31, 2015 and 2014 (in
thousands):
Office and telephone equipment (5 years)
PC and networking hardware (3–4 years)
Software (3–5 years)
Furniture and fixtures (5 years)
Vehicles (5 years)
Leasehold improvement (over less of expected useful life of life of lease)
Property and equipment
Accumulated depreciation
Property and equipment, net
Years Ended December 31,
2015
2014
$
$
127
1,177
12,547
711
54
621
15,237
(5,518)
9,719
$
$
123
1,125
8,532
711
54
571
11,116
(3,254)
7,862
Depreciation and amortization expense for property and equipment was $2.5 million, $1.6 million and $0.9 million for 2015,
2014 and 2013, respectively.
The Company capitalized interest of $0.2 million and $0.1 million in 2014 and 2013, respectively, related to software
developed for internal use.
4. Intangible Assets
The Company acquired an insurance company in 2007, which originally included licenses in 23 states. These licenses were
valued at $4.8 million. The Company is currently licensed in all 50 states, the District of Columbia and Puerto Rico. Most
licenses are renewed annually upon payment of various fees assessed by the issuing state. Renewal costs are expensed as
incurred. This is considered an indefinite-lived intangible asset given the planned renewal of the certificates of authority and
applicable licenses for the foreseeable future. No impairments have been recorded on this asset as of December 31, 2015.
78
5. Investment Securities
The amortized cost, gross unrealized holding losses, and fair value of available-for-sale and short-term investments by major
security type and class of security were as follows as of December 31, 2015 and 2014 (in thousands):
As of December 31, 2015
Available-for-sale:
Foreign deposits
Municipal bond
Short-term investments:
U.S. Treasury securities
Certificates of deposit
U.S. government funds
As of December 31, 2014
Available-for-sale:
Municipal bond
Short-term investments:
U.S. Treasury securities
Certificates of deposit
U.S. government funds
Amortized
Cost
Gross
Unrealized
Holding
Losses
Fair
Value
$
$
$
1,442
1,000
2,442
5,683
1,551
18,054
25,288
$
— $
(54) $
(54) $
— $
—
—
— $
1,442
946
2,388
5,683
1,551
18,054
25,288
Amortized
Cost
Gross
Unrealized Holding
Losses
Fair
Value
$
$
$
1,000
1,000
5,677
800
15,894
22,371
$
(58) $
(58) $
— $
— $
— $
— $
942
942
5,677
800
15,894
22,371
$
$
$
$
$
$
$
$
Maturities of debt securities classified as available-for-sale were as follows (in thousands):
Available-for-sale:
Due under one year
Due after one year through five years
Due after five years through ten years
Due after ten years
December 31, 2015
Amortized
Cost
Fair
Value
$
$
— $
1,442
1,000
—
2,442
$
—
1,442
946
—
2,388
The Company had one investment with an unrealized loss of $0.1 million and a fair value of $0.9 million at December 31, 2015
and 2014. This investment has been in an unrealized loss position for more than 12 months. The Company assessed the bond
for credit impairment and determined that there is no intent to sell this bond and it is likely that it will hold the investment for a
period of time sufficient to allow for recovery. Furthermore, future payments on this bond are insured by a financial guarantee
insurer. Therefore, the Company believes that the unrealized loss on this bond constitutes a temporary impairment.
79
6. 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):
Assets
Foreign deposits
Municipal bond
Money market funds
Total
Assets
Municipal bond
Money market funds
Total
Fair Value
Level 1
Level 2
Level 3
As of December 31, 2015
$
$
$
$
1,442
$
1,442
$
— $
946
7,545
—
7,545
946
—
9,933
$
8,987
$
946
$
Fair Value
Level 1
Level 2
Level 3
As of December 31, 2014
942
44,575
45,517
$
$
— $
44,575
44,575
$
942
—
942
$
$
—
—
—
—
—
—
—
A rollforward of activity in liabilities valued using Level 3 inputs is as follows (in thousands):
Balance at January 1,
Issued warrant liability awards
Settlement of warrant liability upon exercise
Change in fair value upon remeasurement
Reclassification to stockholders’ equity
Balance at December 31,
Warrant
Liabilities
2014
$
$
4,900
1,124
(1,270)
(1,574)
(3,180)
—
Changes in fair value upon remeasurement are recorded in other (income) expense, net on the consolidated statement of
operations.
The Company estimates fair value for its long-term debt based upon rates currently available to the Company for debt with
similar terms and remaining maturities. This is a Level 3 measurement. Based upon the terms of the debt, the carrying amount
of long term debt approximated fair value at December 31, 2014.
The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or
change in circumstances that caused the transfer. There were no transfers between levels for the twelve months ended
December 31, 2015 and 2014.
80
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
•
Investment securities: Long-term investments classified as available-for-sale are measured using quoted market prices
when quoted market prices are available. If quoted market prices in active markets for identical assets are not available
to determine fair value, then the Company uses quoted prices of similar instruments and other significant inputs
derived from observable market data obtained from third-party data providers. Short-term investments are carried at
amortized cost and the fair value is disclosed in Note 3. Fair value is determined in the same manner as available-for-
sale securities and is considered a Level 2 measurement.
• Warrant liabilities: These liabilities are valued using the Black-Scholes-Merton option-pricing model using certain
unobservable inputs that are estimated by the Company. These inputs include a measure of volatility using an average
of peer companies’ publicly traded stock volatility, expected dividend payments based on management’s assertion that
no dividends will be paid in the near term, the remaining contractual term and a discount rate using an average
equivalent bond yield calculation. The range of inputs used is as follows:
Expected volatility
Expected dividends
Risk-free rate
Term
Year Ended
December 31,
2014
34%-46%
—%
0.03%-2.02%
0.1-6.0 years
An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement, which may
be significant. The liabilities were revalued each period-end until exercised, expired or modified to exclude recurring fair value
measurement. Gains and losses on revaluation of the liabilities were recorded in other (income) expense, net in the Company’s
consolidated financial statements.
7. Equity Method Investments
During 2015, the Company invested $0.3 million in DataPoint, LLC in exchange for 300,000 units of Series A preferred stock
resulting in a 13% equity interest. Additionally, if certain revenue and EBIT (Earnings before interest and taxes) targets are not
met as of April 1, 2017, the Company’s ownership interest will increase proportionally by the amount by which the targets were
missed, up to a maximum of 28%. The Company’s equity interest in DataPoint, LLC is accounted for under the equity method
as the Company has the ability to exert significant influence. The equity method investment balance is adjusted each period on
a one quarter lag to recognize the proportionate share of net income or loss, including adjustments to recognize certain
differences between the carrying value and the equity in net assets.
8. Commitments and Contingencies
During the third quarter of 2015, the Company entered into a lease agreement for a building located in Seattle, Washington.
The initial 10-year term of the lease is expected to commence in the second quarter of 2016. The Company is obligated to pay
a total of $21.0 million over the 10-year term.
The Company has operating leases, related to equipment and office facilities, which expire over the next three years with
various renewal options. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of
the lease. Rental expense for operating leases was $1.0 million, $0.8 million and $0.8 million during 2015, 2014 and 2013,
respectively.
81
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one
year) as of December 31, 2015, are as follows (in thousands):
Year ending December 31:
2016
2017
2018
2019
2020
2021-2026
Total minimum lease payments
$
$
1,407
1,502
1,887
2,047
2,128
12,495
21,466
The Company has entered into agreements for strategic marketing initiatives, as well as with independent contractors to
provide services for a period of time. Future commitments related to these contracts are as follows (in thousands):
Year ending December 31:
2016
2017
2018
2019
2020
2021
Total minimum commitment
$
$
2,075
782
326
326
141
16
3,666
During 2013, the Company determined that it owes goods and services tax (GST) and harmonized sales tax (HST) in Canada
for certain intercompany fees charged to its Canadian entities from 2007 through 2013. The Company began a voluntary self-
disclosure with the Canada Revenue Agency for these unpaid taxes in 2014 under the Canada Revenue Agency Voluntary
Disclosures Program, which was accepted in 2014. During the second quarter of 2015, the Company received the final
assessment of GST and HST owed and paid the full amount of $0.8 million to the Canada Revenue Agency.
The Company is involved from time to time in claims, regulatory examinations and litigation, including the following:
The Company received an inquiry from the Washington State Office of the Insurance Commissioner (OIC) in December 2012
concerning whether one of its subsidiaries was properly licensed, and whether certain of its employees were properly licensed,
under Washington law. A regulatory examination took place during the third and fourth quarters of 2014. On September 22,
2015, the OIC issued a detailed report and the Company timely issued a response during the fourth quarter of 2015. As of
December 31, 2015 and 2014, the Company had accrued liabilities of $0.4 million and $0.2 million, respectively, for this
matter. Adverse outcomes beyond recorded amounts are reasonably possible. At this stage in the matter, however, the Company
is unable to estimate a possible loss or range of possible loss beyond amounts accrued.
The outcomes of the Company’s legal proceedings are inherently unpredictable, subject to significant uncertainties, and could
be material to the Company’s operating results and cash flows for a particular period. The Company makes a provision for a
liability relating to legal matters when it is both probable that a liability beyond previously accrued amounts has been incurred
and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect
the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events
pertaining to a particular matter.
82
9. Claims Reserve
Activity in the claims reserve is summarized as follows (in thousands):
Claims reserve at beginning of year
Claims incurred during the year related to:
Current year
Prior years
Total claims incurred
Claims paid during year related to:
Current year
Prior years
Total claims paid
Non-cash claims expense
Claims reserve at end of year
Years Ended December 31,
2014
2013
2015
$
5,107
$
5,612
$
2,582
103,373
(49)
103,324
96,951
4,987
101,938
219
6,274
$
$
80,438
(525)
79,913
75,094
5,088
80,182
236
5,107
$
56,702
(65)
56,637
50,907
2,516
53,423
184
5,612
The decrease in incurred claims for prior years in the year ended December 31, 2015, December 31, 2014 and December 31,
2013 is primarily due to less claims than expected relating to prior year claims.
10. Debt
The Company has a revolving line of credit with a bank, which is secured by any and all interest the Company has in assets that
are not otherwise restricted. The revolving line of credit bore a variable interest rate as of December 31, 2015 and 2014, equal
to the greater of 5.0% or 1.5% plus the prime rate. Interest expense is due monthly on the outstanding principal amount with all
amounts outstanding under the revolving line of credit due upon maturity in July 2017. The credit agreement requires the
Company to comply with various financial and non-financial covenants. As of December 31, 2015 and December 31, 2014, the
Company was in compliance with these covenants. This facility also had a compensating balance requirement of $0.5 million
as of December 31, 2015 and 2014.
Borrowings on the revolving line of credit were limited to the lesser of $20.0 million in 2015 and 2014, and the total amount of
cash and securities held by American Pet Insurance Company (APIC), less up to $3.0 million and $0.5 million, respectively, for
obligations the Company may have outstanding for other ancillary services in the future. During 2015, the Company repaid its
borrowings under this facility, and as of December 31, 2015, had no outstanding amounts under this facility. As of
December 31, 2014, the Company’s outstanding borrowings under this facility were $14.9 million.
On December 23, 2013, the Company obtained a term loan in an aggregate principal amount of $12.0 million. This note was
entered into at a discount of $3.8 million related to the issuance of warrants being deducted from the principal amount. On July
2, 2014, the Company entered into an amended and restated credit agreement in relation to this existing $12.0 million term loan
for a secured subordinated term loan totaling $29.0 million, which reflected an increase of $17.0 million from the prior
agreement. The amended principal amount was entered into at an additional discount of $1.1 million as a result of the issuance
of warrants. The term loan bore a fixed interest rate of 11.0% per year and was due on the earlier of three years from the issue
date or certain triggering events, including a qualifying IPO, which would result in a 1.5% prepayment premium on the $17.0
million increase related to the amendment. The $29.0 million term loan was repaid in full on July 23, 2014, including $0.9
million in accrued interest and a prepayment fee of $0.3 million. The unamortized discount on debt totaling $4.4 million was
included in interest expense in the consolidated statement of operations.
The Company entered into a new lease agreement during the third quarter of 2015 which required the Company to issue a
security deposit in the form of an irrevocable standby letter of credit totaling $1.1 million which expires in August 2016 and
renews annually thereafter. This amount reduces the Company’s available revolving line of credit. As of December 31, 2015,
the Company had $18.4 million available under its revolving line of credit.
Interest expense during 2015, 2014 and 2013 related to all loans was $0.3 million, $6.7 million and $0.6 million, respectively.
83
11. Stock-Based Compensation
In June 2014, the Company’s Board of Directors adopted the 2014 Equity Incentive Plan (2014 Plan), which succeeded the
2007 Equity Compensation Plan upon the Company’s IPO. The 2014 Plan authorizes the award of stock options or restricted
stock to directors, officers, employees, and non-employees. All awards have 10-year contractual terms. At December 31, 2015,
there were 3,068,551 additional shares available for the Company to grant under the 2014 Plan.
Stock Options
The grant date fair value of stock option awards are estimated on the date of grant using the Black-Scholes-Merton option-
pricing model. Valuation assumptions for the years ended December 31, 2015, 2014 and 2013 are presented in the following
table:
Years Ended
December 31,
2015
2014
2013
Valuation assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividend yield
3.0-6.25
6.25
37.2%-49.4% 54.3%–59.3% 54.9%–57.4%
1.8%–2.0%
1.1%-2.0%
—%
—%
1.0%–2.0%
—%
6.25
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.
84
Stock option activity for the years ended December 31, 2015, 2014 and 2013 was as follows:
December 31, 2012
Granted
Exercised
Forfeited
December 31, 2013
Granted
Exercised
Forfeited
December 31, 2014
Granted
Exercised
Forfeited
December 31, 2015
Number
of
Options
4,226,883
1,294,150
(547,981)
(309,607)
4,663,445
754,200
(176,595)
(128,494)
5,112,556
698,764
(632,829)
(306,542)
4,871,949
Weighted-
Average
Exercise
Price
1.32
4.40
1.11
2.48
2.12
9.64
1.20
5.40
3.19
7.84
2.12
7.65
3.71
Aggregate
Intrinsic
Value
(in thousands)
—
—
2,285
—
30,406
—
1,428
—
21,116
—
3,703
—
29,644
Vested and exercisable at December 31, 2015
3,575,646
$
2.35
$
26,590
As of December 31, 2015, stock options outstanding had a weighted average remaining contractual life of 6.1 years and vested
and exercisable options had a weighted average remaining contractual life of 5.2 years.
The weighted-average grant date fair value of stock options granted and the fair value of options vested were as follows for the
years ending December 31, 2015, 2014, and 2013:
Year:
2013
2014
2015
Weighted-
Average
Grant Date
Fair Value
(per share)
Fair Value
of Options
Vested
(in thousands)
$
$
$
2.97
5.33
3.46
$
$
$
1,675
2,203
3,796
85
Restricted Stock Awards and Restricted Stock Units
The below table summarizes the Company’s restricted stock award activity for the years ending December 31, 2015, 2014 and
2013:
Weighted-
Average
Grant Date
Nonvested stock award balance at December 31, 2012
Restricted stock awards granted
Awards upon which restrictions lapsed
Restricted stock awards forfeited
Nonvested stock award balance at December 31, 2013
Restricted stock awards granted
Awards upon which restrictions lapsed
Restricted stock awards forfeited
Nonvested stock award balance at December 31, 2014
Restricted stock awards granted
Awards upon which restrictions lapsed
Restricted stock awards forfeited
Nonvested stock award balance at December 31, 2015
Number of
Shares
— $
Fair Value Per
Restricted Stock
—
4.77
4.77
—
4.77
5.79
4.81
—
4.77
7.26
4.80
—
4.77
732,708
(10,482)
—
722,226
6,126
(143,967)
—
584,385
2,385
(119,262)
—
467,508
During the third quarters of 2015 and 2014, 116,877 shares of restricted stock, which were subject to a performance condition
relating to the Company’s IPO, vested and resulted in $0.9 million and $1.6 million of expense, respectively, included in
general and administrative expense in the consolidated statement of operations. The fair value of these vested shares was
approximately $0.9 million and $1.2 million, respectively. The remaining 467,508 shares of unvested restricted stock related to
this agreement are expected to vest over the remaining service term of approximately four years.
Stock-based compensation expense includes stock options, restricted stock units and restricted stock awards granted to
employees and non-employees, and is reported in the Company’s consolidated statement of operations in claims expenses,
other cost of revenue, sales and marketing, technology and development, and general and administrative expenses depending
on the function performed by the employee or non-employee. Stock-based compensation expense recognized in each category
of the consolidated statement of operations for the years ended December 31, 2015, 2014 and 2013 was as follows (in
thousands):
Claims expenses
Other cost of revenue
Sales and marketing
Technology and development
General and administrative
Total stock-based compensation
Years Ended December 31,
2015
2014
2013
$
219
$
236
$
44
446
404
1,889
79
553
461
2,755
184
46
677
351
680
$
3,002
$
4,084
$
1,938
As of December 31, 2015, the Company had unrecognized stock-based compensation expense of $5.5 million, which is
expected to vest over a weighted-average period of approximately 2.6 years. As of December 31, 2015, the Company had
1,257,414 unvested stock options and 472,384 restricted stock awards that are expected to vest. No net tax benefits related to
the stock-based compensation costs have been recognized since the Company’s inception.
12. 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
86
14,944,945 and 2,247,130 shares of common stock, respectively. If this transaction had taken place on January 1, 2014, the
Company’s weighted-average shares outstanding for the twelve months ended December 31, 2014 would have been
27,067,167.
As of December 31, 2015, the Company had 200,000,000 shares of common stock authorized and 28,396,189 shares of
common stock outstanding. Holders of common stock are entitled to one vote on each matter properly submitted to the
stockholders of the Company except those related to matters concerning possible outstanding preferred stock. At December 31,
2015, the Company had 10,000,000 shares of undesignated shares of preferred stock authorized for future issuance and did not
have any outstanding shares of preferred stock. The holders of common stock are also entitled to receive dividends as and when
declared by the board of directors of the Company, whenever funds are legally available. These rights are subordinate to the
dividend rights of holders of all classes of stock outstanding at the time. The Company is unable to pay dividends to
stockholders as of December 31, 2015 due to restrictions in its credit agreements.
Warrants
At December 31, 2015 and 2014, the Company had warrants to purchase 869,999 shares of common stock at $10.00 per share,
which begin to expire in 2018. At the end of each reporting period prior to the IPO, the Company adjusted the fair value of the
warrants (see Note 6). Immediately following the IPO, these warrants were no longer subject to contractual modification
provisions and were reclassified from a liability classification to an equity classification on the consolidated balance sheet.
13. Segments
The Company has two segments: subscription business and other business. The subscription business segment includes
monthly subscriptions related to the Company’s medical plan which are marketed directly to consumers, while the other
business segment includes all other business that is not directly marketed to consumers. Prior to January 1, 2015, certain
enrollments that were not marketed directly to consumers were included in the subscription business segment as they were not
segregated in reporting used by the chief operating decision maker. As of January 1, 2015, the Company began reporting these
pets in its other business segment due to the characteristics of this business being similar to other arrangements within the other
business segment. In addition, the chief operating decision maker began using information related to the subscription business
segment excluding these pets in order to evaluate the Company’s business and operations and make decisions. As such, these
pets have been considered a part of the other business segment after January 1, 2015. Prior period segment information
presented below has been recast to reflect this change.
The chief operating decision maker uses two measures to evaluate segment performance: revenue and gross profit.
Additionally, other operating expenses, such as sales and marketing expenses, are allocated to each segment and evaluated
when material. Interest and other expenses and income taxes are not allocated to the segments, nor included in the measure of
segment profit or loss. The Company does not analyze discrete segment balance sheet information related to long-term assets.
Revenue and gross profit of the Company’s segments were as follows (in thousands):
Revenue:
Subscription business
Other business
Claims expenses:
Subscription business
Other business
Other cost of revenue:
Subscription business
Other business
Gross profit:
Subscription business
Other business
Sales and marketing
Technology and development
General and administrative
Operating loss
Years Ended December 31,
2015
2014
2013
$
133,406
$
103,502
$
13,557
146,963
95,420
7,904
103,324
14,008
4,402
18,410
23,978
1,251
25,229
15,231
11,215
12,408
115,910
74,206
5,707
79,913
10,963
5,160
16,123
18,333
1,541
19,874
11,608
9,899
15,558
(16,775) $
14,312
(15,945) $
$
76,413
7,416
83,829
53,288
3,349
56,637
8,106
3,442
11,548
15,019
625
15,644
9,091
4,888
8,652
(6,987)
The following table presents the Company’s revenue by geographic region of the member (in thousands):
United States
Canada
Total revenue
Years Ended December 31,
2015
116,585
30,378
146,963
$
$
$
$
2014
2013
86,494
29,416
115,910
$
$
58,847
24,982
83,829
Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2015 and 2014.
88
14. Dividend Restrictions and Statutory Surplus
The Company’s business operations are conducted through subsidiaries, one of which is an insurance company domiciled in
New York, and one which is a segregated cell business, Wyndham Segregated Account AX, located in Bermuda. In addition to
general state law restrictions on payments of dividends and other distributions to stockholders applicable to all corporations,
insurance companies are subject to further regulations that, among other things, may require such companies to maintain
certain levels of equity and restrict the amount of dividends and other distributions that may be paid to their parent
corporations.
Under regulatory requirements at December 31, 2015, the amount of dividends that may be paid by the Company’s insurance
subsidiary in New York to the Company without prior approval by regulatory authorities was less than $0.1 million. The initial
dividend payment to be paid from the segregated cell business to the Company, will not be calculated until 24 months from the
effective date and annually thereafter. During 2015, 2014 and 2013, the Company’s insurance subsidiaries did not pay any
dividends to the Company.
The statutory net income for 2015, 2014 and 2013 and statutory capital and surplus at December 31, 2015, 2014 and 2013, for
the Company’s insurance subsidiary was as follows (in thousands):
Statutory net income
Statutory capital and surplus
As of December 31,
2015
2014
2013
$
$
1,386
26,068
$
990
23,661
1,126
16,875
As of December 31, 2015, the Company’s insurance subsidiary maintained $26.1 million of statutory capital and surplus which
was above the required amount of $24.5 million of statutory capital and surplus to avoid additional regulatory oversight. As of
December 31, 2015 and 2014, the Company had $6.5 million on deposit with various states in which it writes policies.
15. Related Parties
The Company is party to an arrangement with the father of the Company’s Chief Executive Officer, who serves as an
independent contractor, to develop veterinary relationships and build referrals. The terms of the independent contractor
agreement are consistent with the terms of other similar independent contractors that do business with the Company. Total
amounts paid to the related party in 2015, 2014 and 2013 were $0.3 million.
16. Income Taxes
Income (loss) before income taxes was as follows for the years ended December 31, 2015, 2014 and 2013 (in thousands):
United States
Foreign
Years Ended December 31,
2015
2014
2013
$
$
(17,222) $
131
(17,091) $
(21,371) $
187
(21,184) $
(8,256)
(11)
(8,267)
89
The components of income tax expense (benefit) were as follows (in thousands):
Current:
U.S. federal & state
Foreign
Deferred:
U.S. federal & state
Foreign
Income tax expense (benefit)
Years Ended December 31,
2015
2014
2013
$
$
31
84
115
—
(1)
(1)
114
$
$
$
26
(30)
(4)
—
(3)
(3)
(7) $
30
(122)
(92)
—
—
—
(92)
A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial
statements is presented below:
Federal income taxes at statutory rate
Equity compensation
Change in valuation allowance
Other, net
Effective income tax rate
Years Ended December 31,
2015
2014
2013
34.0 %
(1.2)
(34.9)
1.4
(0.7)%
34.0%
(0.9)
(32.5)
(0.5)
0.1%
34.0%
(8.6)
(25.1)
0.8
1.1%
The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Current:
Unearned premium reserves
Loss reserves
Other
Noncurrent:
Net operating loss carryforwards
Depreciation and amortization
Equity compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Current:
Deferred costs
Noncurrent:
Intangible assets
Other
Total deferred tax liabilities
Total deferred taxes
Less deferred tax asset valuation allowance
Net deferred taxes
90
Years Ended December 31,
2015
2014
$
745
167
690
20,514
451
713
96
23,376
863
150
801
14,346
356
713
228
17,457
(189)
(140)
(1,623)
(72)
(1,884)
21,492
(23,110)
(1,618) $
(1,623)
—
(1,763)
15,694
(17,313)
(1,619)
$
$
At December 31, 2015, the Company had federal net operating loss carryforwards of $63.5 million. Use of the carryforwards is
limited based on the future income of the Company. The federal net operating loss carryforwards will begin to expire in 2027.
Approximately $3.1 million of the net operating loss (NOL) carryforwards relate to tax deductible stock-based compensation in
excess of amounts recognized for financial statement purposes. To the extent that net operating loss carryforwards, if realized,
relate to excess stock-based compensation, the resulting tax benefits will be recorded to stockholders’ equity, rather than to
results of operations. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net
operating loss carryforwards and credit carryforwards may be limited if the Company experiences an ownership change. The
Company has not performed a significant analysis to determine whether the qualifying change in ownership that would limit
the utilization of the NOLs has taken place.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the
evidence, both positive and negative, the Company has recorded a full valuation allowance against its deferred tax assets at
December 31, 2015 and 2014, because the Company’s management has determined that it is more likely than not that these
assets will not be fully realized.
The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2012 through 2015.
The Company is also open to examination for 2007 and forward with respect to net operating loss carryforwards generated and
carried forward from those years in the United States. The Company is open to examination by the Canada Revenue Agency for
the years ended December 31, 2011 through 2015 for all corporate tax matters, and open for the years ended December 31,
2008 through 2015 for transactions with non-arm’s length non-Canadian residents.
The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement
criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the taxing
authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. If the tax position
meets the more-likely-than-not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement
with the relevant tax authority is recognized in the financial statements. Net unrecognized tax benefits, interest, and penalties
not expected to be settled within one year are included in other long-term liabilities on the consolidated balance sheets. No
significant changes in uncertain tax positions are expected in the next twelve months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
Balance, beginning of year
Decreases to tax positions related to prior periods
Increases to tax positions related to the current year
Balance, end of year
2015
Years Ended
December 31,
2014
$
$
65
—
15
80
$
$
390
(346)
21
65
$
$
2013
526
(162)
26
390
17. Employee Benefits
The Company has a 401(k) plan for its U.S. employees. The plan allows employees to contribute a percentage of their pretax
earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows the Company to make a
matching contribution, subject to certain limitations. To date, the Company has made no contributions to the 401(k) plan.
91
18. Quarterly Financial Information (Unaudited)
The following table contains selected unaudited financial data for each quarter of 2015 and 2014. The unaudited information
should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report. The
Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of
results for any future period.
Dec. 31,
2015
Sept. 30,
2015
Jun. 30,
2015
Mar. 31,
2015
Dec. 31,
2014
Sept. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
Three Months Ended
$
Total revenues
Gross profit
Net loss
Net loss per share attributable to common stockholders:
40,201
7,270
(3,001)
37,865
6,591
(4,643)
$
$
(in thousands, except share amounts)
$
35,587
5,786
(4,625)
$
33,310
5,582
(4,936)
$
31,868
5,524
(4,276)
$
30,312
4,445
(8,509)
$
28,090
5,150
(3,479)
25,640
4,756
(4,913)
Basic and diluted
(0.16)
(0.17)
Weighted average shares used to compute net loss per share attributable to common stockholders:
27,231,651
Basic and diluted
27,856,450
27,755,310
27,337,302
27,597,721
(0.11)
(0.17)
(0.18)
(0.41)
(2.25)
(3.22)
20,857,126
1,543,134
1,524,028
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act),
as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined under Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Management has assessed the effectiveness of its
internal control over financial reporting as of December 31, 2015 based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
As a result of this assessment, management concluded that, as of December 31, 2015, its internal control over financial
reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules
13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2015 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that
management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Item 9B. Other Information
None.
92
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 11. Executive Compensation
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 14. Principal Accountant Fees and Services
Information required by this Item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual
Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual
Report.
93
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
We have filed the financial statements listed in the Index to Financial Statements as a part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
Schedule I Condensed Financial Information of Registrant
No other financial statement schedules have been provided because the information called for is not required or is shown either
in the financial statements or notes thereto.
(a)(3) Exhibits
The list of exhibits included in the Exhibit Index to this Annual Report on Form 10-K is incorporated herein by reference.
94
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Seattle, state of Washington, on
this 16th day of February, 2016.
SIGNATURES
TRUPANION, INC.
By:
/s/ Darryl Rawlings
Darryl Rawlings
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and
appoints Darryl Rawlings, Michael Banks and Asher Bearman, and each of them, as his or her true and lawful attorneys-in-fact,
proxies and agents, each with full power of substitution, for him or her in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, proxies and agents
full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection
therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact, proxies and agents, or their or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
95
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
Date: February 16, 2016
/s/ Darryl Rawlings
Darryl Rawlings
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Michael Banks
Michael Banks
Chief Financial Officer(Principal Financial and
Accounting Officer)
/s/ Murray Low
Murray Low
Chairman of the Board of Directors
/s/ Chad Cohen
Chad Cohen
Director
/s/ Michael Doak
Michael Doak
Director
/s/ Robin Ferracone
Robin Ferracone
Director
/s/ Dan Levitan
Dan Levitan
Director
/s/ H. Hays Lindsley
H. Hays Lindsley
Director
/s/ Glenn Novotny
Glenn Novotny
Director
/s/ Howard Rubin
Howard Rubin
Director
96
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an
exhibit is incorporated by reference, the number in parentheses indicates the document to which cross-reference is made. See
the end of this exhibit index for a listing of cross-reference documents.
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Exhibit Filing Date
Herewith
Incorporated by Reference
Filed/
Furnished
3.1 Restated Certificate of Incorporation of the
10-Q
001-36537
Registrant.
3.2 Restated Bylaws of the Registrant.
10-Q
001-36537
4.1
Form of Common Stock Certificate.
S-1
333-196814
4.2
Third Amended and Restated Registration
Rights Agreement, dated October 25, 2011, by
and among the Registrant and certain of its
stockholders, as amended.
S-1
333-196814
3.1
3.2
4.1
4.4
8/28/2014
8/28/2014
6/16/2014
6/16/2014
10.1+
Form of Indemnity Agreement.
S-1
333-196814
10.1
6/16/2014
10.2+
10.3+
2007 Equity Compensation Plan and forms of
stock option agreements and exercise notices,
restricted stock notice agreement and restricted
stock agreement thereunder.
2014 Equity Incentive Plan and forms of stock
option award agreement, restricted stock
agreement and restricted stock unit award
agreement thereunder.
S-1
333-196814
10.2
6/16/2014
S-1
333-196814
10.3
6/16/2014
10.4+
2014 Employee Stock Purchase Plan.
S-1
333-196814
10.4
6/16/2014
10.5+ Amended and Restated Employment
S-1
333-196814
10.6
6/16/2014
Agreement, dated April 20, 2007, by and
between the Registrant and Darryl Rawlings.
10.6+
Employment Agreement, dated June 13, 2012,
by and between the Registrant and Michael
Banks.
10.7+ Consulting Agreement, dated May 5, 2014, by
and between the Registrant and Howard Rubin.
10.8+
Independent Contractor Agreement, effective
as of March 7, 2014, by and between the
Registrant and Peter R. Beaumont.
10.9 Amended and Restated Loan and Security
Agreement, dated August 24, 2012, by and
among the Registrant, Trupanion Managers
USA, Inc. and Square 1 Bank, as amended.
10.10
Seventh Amendment to Amended and Restated
Loan and Security Agreement, dated December
19, 2014, by and among the Registrant,
Trupanion Managers USA, Inc. and Square 1
Bank.
S-1
333-196814
10.7
6/16/2014
S-1
333-196814
10.8
6/16/2014
S-1
333-196814
10.9
6/16/2014
S-1
333-196814
10.10
6/16/2014
10-K
001-36537
10.10
2/24/2015
97
10.11 Eighth Amendment to Amended and Restated
Loan and Security Agreement, dated
September 4, 2015, by and among the
Registrant, Trupanion Managers USA, Inc. and
Square 1 Bank.
10.11 Lease Agreement, dated June 14, 2012, by and
between American Pet Insurance Company and
the Housing Authority of the City of Seattle, as
amended.
10.12
Lease, dated August 29, 2011, by and between
C.D. Stimson Company and American Pet
Insurance Company.
10-Q 001-36537
10.2
11/4/2015
S-1
333-196814
10.13
6/16/2014
S-1
333-196814
10.14
6/16/2014
10.12 Office Lease Agreement between Trupanion
10-Q
001-36537
10.1
11/4/2015
Inc. and Benaroya Capital Company, LLC,
dated August 10, 2014.
10.13† Agency Agreement between Omega General
Insurance Company and Trupanion Brokers
Ontario, Inc., effective January 1, 2015.
10.14†
Fronting and Administration Agreement
between Wyndham Insurance Company (SAC)
Limited and Omega General Insurance
Company, effective January 1, 2015.
10.15† Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2015.
10.16† Amendment to Lease Agreement, dated
December 7, 2015, by and between American
Pet Insurance Company and Selig Real Estate
Holdings XXXIV, LLC, as amended.
21.1
Subsidiaries of the Registrant.
23.1 Consent of independent registered public
accounting firm.
24.1
Power of Attorney (reference is made to the
signature page hereto)
31.1 Certification of Principal Executive Officer,
pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer,
pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2* Certification of Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema
Document.
10-K
001-36537
10.13
2/24/2015
10-K
001-36537
10.14
2/24/2015
10-K
001-36537
10.15
2/24/2015
98
X
X
X
X
X
X
X
X
X
X
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition
Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase
Document.
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document.
X
X
X
X
+ Indicates a management contract or compensatory plan or arrangement.
† Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment under Rule 24b-2
promulgated under the Exchange Act. The omitted portions of this exhibit have been filed separately with the SEC.
* This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of
that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
99
Schedule I - Condensed Financial Information of Registrant
Trupanion, Inc.
Condensed Balance Sheets
(Parent Company Only)
(In thousands, except for share and per share data)
Assets
Current assets:
Cash and cash equivalents
Prepaid expenses and other assets
Total current assets
Equity method investment
Property and equipment, net
Intangible assets, net
Advances to and investments in subsidiaries
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred tax liabilities
Total current liabilities
Long-term debt
Deferred tax liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.00001 par value per share, 200,000,000 shares authorized at December 31,
2015 and December 31, 2014, 29,017,168 and 28,396,189 issued and outstanding at December
31, 2015; 28,451,920 and 27,830,941 shares issued and outstanding at December 31, 2014.
Preferred stock: $0.00001 par value per share, 10,000,000 authorized at December 31, 2015 and
December 31, 2014, and 0 issued and outstanding at December 31, 2015 and December 31,
2014.
Additional paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Treasury stock, at cost: 620,979 shares at December 31, 2015 and December 31, 2014.
Total stockholders’ equity
Total liabilities and stockholders’ equity
As of December 31,
2015
2014
$
6,040
$
$
$
364
6,404
300
641
4,784
35,006
47,135
$
11
$
145
169
325
—
1,454
1,779
—
—
122,844
(502)
(74,385)
(2,601)
45,356
$
47,135
$
45,042
399
45,441
—
450
4,847
25,219
75,957
7
152
124
283
14,900
1,499
16,682
—
—
119,045
11
(57,180)
(2,601)
59,275
75,957
100
Trupanion, Inc.
Condensed Statements of Comprehensive Loss
(Parent Company Only)
(In thousands)
Expenses:
Claims expenses
Other costs of revenue
Sales and marketing
Technology and development
General and administrative
Total expenses
Operating loss
Interest expense
Other (income) loss
Loss before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net loss
Other comprehensive (loss) income, net of taxes:
Other comprehensive (loss) income of subsidiaries
Other comprehensive (loss) income
Comprehensive loss
Years Ended December 31,
2015
2014
2013
$
$
$
$
226
44
621
628
3,852
5,371
(5,371)
325
(2)
(5,694)
(11,511)
(17,205) $
(513)
(513)
(17,718) $
$
240
79
553
528
4,108
5,508
(5,508)
6,726
(1,575)
(10,659)
(10,518)
(21,177) $
175
175
(21,002) $
187
46
677
391
1,131
2,432
(2,432)
609
630
(3,671)
(4,504)
(8,175)
(22)
(22)
(8,197)
101
Trupanion, Inc.
Condensed Statements of Cash Flows
(Parent Company Only)
(In thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Years Ended December 31,
2015
2014
2013
$
(17,205) $
(21,177) $
(8,175)
Loss attributable to equity method investments
Depreciation and amortization
Amortization of debt discount and prepaid loan fees
Warrant expense
Stock-based compensation expense
Other
Changes in operating assets and liabilities:
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Net cash (used in) provided by operating activities
Investing activities
Purchases of property and equipment
Equity method investment
Advances to and investments in subsidiaries
Net cash used in investing activities
Financing activities
Restricted cash
Tax withholding on restricted stock
Proceeds from exercise of stock options
Repayment of debt financing
Other financing costs
Net Proceeds from IPO
Net cash (used in) provided by financing activities
Effect of foreign exchange rates on cash, net
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures
Income taxes paid
Interest paid
Noncash investing and financing activities:
Warrants issued in conjunction with debt issuance
Exchange of stock and intangible asset for equity method investment
Cashless exercise of preferred stock warrants
Common stock warrant reclassification to equity
11,511
126
21
—
3,002
—
14
(1,389)
(8)
(3,928)
(149)
(300)
(19,900)
(20,349)
—
(643)
1,335
(14,900)
—
—
(14,208)
(517)
(39,002)
45,042
10,518
67
5,033
(1,574)
4,084
—
(339)
889
(84)
(2,583)
(243)
—
(22,209)
(22,452)
3,000
—
211
(15,000)
(103)
72,755
60,863
175
36,003
9,039
$
6,040
$
45,042
$
—
(155)
—
—
—
—
—
(1,494)
1,124
—
1,270
3,180
4,504
37
36
543
1,938
52
(64)
1,840
206
917
(65)
—
(9,455)
(9,520)
(3,000)
—
607
20,000
(56)
—
17,551
(22)
8,926
113
9,039
—
(642)
3,806
448
—
—
102
1. Organization and Presentation
The accompanying condensed financial statements present the financial position, results of operations and cash flows for
Trupanion, Inc. These condensed unconsolidated financial statements should be read in conjunction with the consolidated
financial statements of Trupanion, Inc. and its subsidiaries and the notes thereto (the Consolidated Financial Statements).
Investments in subsidiaries are accounted for using the equity method of accounting.
Additional information about Trupanion, Inc.’s accounting policies pertaining to intangible assets, commitments and
contingencies, debt financing, stock-based compensation, and stockholders’ equity are set forth in Notes 4, 8, 10, 11 and 12,
respectively, to the Consolidated Financial Statements
103