2017 Annual Report
To our shareholders,
In my opinion, our company continues to make incremental progress. In our marathon
analogy, we have moved onto mile five.
In general, our 2017 results were consistent with 2015 and 2016. Our performance in 2017 was
aided by a large, under-penetrated market, a business model based on monthly recurring
revenue, and 17 years of incremental progress so that we can begin to benefit from scale. For
me, the most interesting learnings occurred in the second half of the year, when we increased
some pet acquisition testing and cautiously began to tap our foot on the accelerator.
As promised in last year’s letter, our shareholder meeting on June 7, 2018 in Seattle will be the
primary communications vehicle for the management team to provide specific details about
individual initiatives. Once again, our first public shareholder letter is attached. The 2014 letter
is meant to act as a reminder of how we at Trupanion operate and think.
TRUPANION | 2
2017 SHAREHOLDER LETTER NOW LET’S GET STARTED WITH OUR FINANCIAL PERFORMANCE
We ended 2017 with 423,194 enrolled pets and revenue of $243 million. We spent 70% of our
revenue paying our members’ veterinary invoices, 12% in variable expenses supporting our
members 24/7, and 8% on fixed expenses.1 This left us with 9.6% or $23.4 million as our adjusted
operating income, which is the profit we generated from our existing pets before spending to
acquire new pets during the year.
This year, at our discretion, we invested $18.4 million of the $23.4 million to acquire 105,180
Trupanion pets. We estimate the $18.4 million we invested in acquiring new pets will produce
an IRR* of 36% for the average pet.
*Internal Rate of Return (IRR) refers to our anticipated return on spend to acquire pets.
TABLE 1 – FINANCIAL PERFORMANCE 2012-2017
YEAR
ENROLLED
PETS
REVENUE
YOY
REVENUE
GROWTH
ADJUSTED
OPERATING
INCOME
INVESTED
CAPITAL
TO ACQUIRE
NEW PETS
IRR ON AN
AVERAGE
PET2
CASH AND
SHORT-TERM
INVESTMENTS,
MINUS DEBT
EARNINGS
(NET LOSS)
2012
2013
2014
2015
2016
2017
127,704
$55.5M
182,497
$83.8M
232,450
$115.9M
291,818
$147.0M
343,649
$188.2M
423,194
$242.7M
50%
51%
38%
27%
28%
29%
$3.0M
$4.3M
$0.9M
$3.6M
$14.8M
$23.4M
$6.7M
$8.4M
$11.1M
$14.8M
$14.7M
$18.4M
n/a
n/a
n/a
n/a
31%
36%
$5.1M
$7.9M
$60.6M
$43.2M
$48.8M
$54.4M
$(8.1M)
$(8.2M)
$(21.2M)
$(17.2M)
$(6.9M)
$(1.5M)
A detailed look at how we calculate the IRR on the $18.4M we spent to acquire 105,180 new
pets is shown below.
TABLE 2 – 2017 IRR CALCULATION
MONTHS
CHURN
YEAR
MONTHS
AOM
CAPITAL CHARGE
PAC
FCP
73.0
1.37%
LVP
LVP:PAC
$727
4.8x
AOM
ARPU
9.6%
$52.07
0
6
$30
$(3)
$(152)
$(125)
1
12
$60
$(5)
2
12
$60
$(5)
3
12
$60
$(5)
4
12
$60
$(5)
5
12
$60
$(5)
6
7.0
$35
$(3)
$55
$55
$55
$55
$55
$32
73.0
$366
$(32)
IRR
36%
LVP = Lifetime Value of a Pet AOM = Adjusted Operating Margin ARPU = Average Revenue Per Pet (Unit)
PAC = Pet Acquisition Cost
FCP = Free Cash Flow Per Pet
On a fully diluted per share basis, our revenue grew 27%, while our adjusted operating income
per share benefited from the scaling of our fixed expenses and increased by 57% in 2017. The
year-over-year improvements in our adjusted operating income and our IRR on acquisition
spend are two metrics that I am both proud of and that I believe are representative of our
achievements during the year. I do not feel the same about our revenue growth and feel
compelled to temper some enthusiasm.
TRUPANION | 3
2017 SHAREHOLDER LETTER To a casual observer, our revenue grew 29%, which is on the high end of our previously stated
20% to 30% revenue growth target. To level set:
• As shown the table below, revenue grew 27% on a per-share basis, not 29%. It
is important that we provide visibility into our stock-based compensation, plus
any other dilution if it were to occur.
• Our “other business,” which is made up of pets that roll-on and roll-off in
groups, grew by 63% in 2017. This is unusual growth. Typically, we expect
growth in this segment to be approximately 10% -12% per year, which is similar
to the performance of the overall category in North America.
• When you back out the unusual growth of our “other business” segment, our
revenue growth was 25% per share.
• ARPU grew by 9% in 2017 — this is higher than normal. It was the result of our
focus on providing the same value proposition to each sub-category of pets.
17% of our sub-categories needed a larger increase than what we believe is
normal. Typical annual inflationary growth of our average monthly revenue
per pet (ARPU) is 5% to 6%.
• When you back out the extra 3% ARPU growth, our “steady state” growth per
share reduces from 25% to 22%.
For me, 22% is more representative of our underlying revenue growth per share, and while this is
still within our 20% to 30% revenue growth target, it moves from the high end to the lower end of
that range.
TABLE 3 – GROWTH PER SHARE
TOTAL SHARE
COUNT PLUS
OPTIONS &
WARRANTS
GRANTED*
22,467,205
24,889,316
33,813,736
34,138,237
YEAR
2012
2013
2014
2015
2016*
34,879,610
2017*
35,444,460
REVENUE
PER SHARE*
YOY
GROWTH
ADJUSTED
OPERATING
INCOME
PER SHARE*
YOY
GROWTH
CASH AND
SHORT-TERM
INVESTMENTS
MINUS DEBT PER
SHARE*
$2.47
$3.37
$3.43
$4.31
$5.40
$6.85
53%
36%
2%
26%
25%
27%
$0.13
$0.17
$0.03
$0.11
$0.42
$0.66
-7%
31%
-82%
267%
282%
57%
$0.23
$0.32
$1.79
$1.27
$1.40
$1.53
YOY
GROWTH
LOSS PER
SHARE**
-30%
39%
459%
-29%
10%
9%
$(9.76)
$(6.23)
$(1.64)
$(0.62)
$(0.24)
$(0.05)
* 2016 includes 34,431,970 shares outstanding and granted as of 12/31/16, plus 447,640 options granted in May 2017, awarded
for 2016 performance. 2017 includes 35,194,737 shares outstanding and granted as of 12/31/17, plus 249,723 restricted stock
units granted in February 2018, awarded for 2017 performance.
** Earnings (loss) per share is calculated using the GAAP basis weighted-average shares as of 12/31/2017.
In the 2014 shareholder letter I stated, “discounted cash flow 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.” For purposes of the Performance Stock Grant Program, we internally calculate the
appreciation of the company’s intrinsic value by using a 15-year discounted cash flow method.
We lock down the terminal growth rates and weighted average cost of capital, we eliminate
TRUPANION | 4
2017 SHAREHOLDER LETTER any impacts of changes to interest rates as we believe our team (all of the employees) should
not benefit or suffer from such impacts, and most importantly, we use past performance to
model future results. This way we are measuring execution achieved versus execution modeled.
For this methodology, we are not concerned with the dollar value calculated on an annual
basis, only the year-over-year percentage change.
As we described in the 2016 shareholder letter, “I believe that sharing a small percentage of
the net value creation with the team will continue to drive the correct alignment between the
company’s team members and shareholders.”
In 2017, we calculated the increase in Trupanion’s intrinsic value to be 22% before performance
stock grants. Based on the Performance Stock Grant Program chart found on Table 3 of the
2016 shareholder letter, dilution should be 1.3% when achieving a 22% increase in our intrinsic
value. After this dilution, the increase to intrinsic value on a per share basis is 20.7%.
At 1.3%, the total size of the grant pool in 2017 was 352,849 shares. 103,126 were allocated
during the year for new hire grants, individual performance awards and board compensation,
leaving 249,723 shares that were issued in Q1 2018 for our Performance Stock Grant Program.
STOCK PRICE
Warren Buffett stated in his 1996 Owner’s Manual, principal 14:
“ To the extent possible, we would like each Berkshire shareholder to record a gain or
loss in market value during his period of ownership that is proportional to the gain or
loss in per-share intrinsic value recorded by the company during that holding period.
For this to come about, the relationship between the intrinsic value and the market
price of a Berkshire share would need to remain constant, and by our preferences at
1-to-1. As that implies, we would rather see Berkshire’s stock price at a fair level than
a high level. Obviously, Charlie and I can’t control Berkshire’s price. But by our policies
and communications, we can encourage informed, rational behavior by owners that,
in turn, will tend to produce a stock price that is also rational. Our it’s-as-bad-to-be-
overvalued-as-to-be-undervalued approach may disappoint some shareholders. We
believe, however, that it affords Berkshire the best prospect of attracting long-term
investors who seek to profit from the progress of the company rather than from the
investment mistakes of their partners.”
If everything were linear (it is not), and with a very large under-penetrated market (which we
think we have), we believe we have the opportunity to compound growth for decades. We,
like Mr. Buffett, desire that our long-term shareholders, who are getting on or getting off our train,
earn fair and appropriate returns reflecting our actual execution and performance over their
holding period.
In 2016, we shared that the Performance Grant pool was 447,640. This represented 1.7%
dilution, indicating we believed the intrinsic value of the company increased 23.3% post-
dilution from 2015 to 2016 (for reference, see table 3 in the 2016 shareholder letter). This year’s
dilution was 1.3%, indicating we believe the intrinsic value increased an additional 20.7% post-
dilution between 2016 and 2017. If our methodologies are correct, over the last two years the
appreciation per share should have been 44% (23.3% + 20.7% = 44%). If for some reason the
starting stock price was 10% lower, one might expect a 54% change (44% + 10% = 54%) or
TRUPANION | 5
2017 SHAREHOLDER LETTER alternatively if the starting stock price was 10% higher, then a 34% change (44%-10%= 34%)
would make sense. Over the passage of years, we can only hope that our shares trade within
a narrow band of our intrinsic value most of the time.
We are certainly not obsessed with our stock price, but on a quarterly basis we do compare it
to what we believe is our intrinsic value. If the stock price is trading by more than 20% discount
to what we believe is our intrinsic value and we have excess cash, we might consider a stock
repurchase. If the stock price is trading at more than a 20% premium to what we believe is
our intrinsic value, I would prefer that people not buy our shares during that time. Since going
public we have only raised equity once, on July 18, 2014 when we IPO’d. I believed at the
time, and continue to believe today, that the shares were priced within +/- 20% of our intrinsic
value. Since being public, there have been sustained periods of time when we felt that our
share price was trading at a discount larger than 20% to our intrinsic value. During these times,
we engaged in an increased level of investor relations activities based on our belief that it
was a good entry point for long-term shareholders to acquire or increase a position in us (as
we were not in a cash position to repurchase shares). For a brief period in 2017, before the
corporate income taxes in the United States were lowered, our stock was trading greater than
20% above our intrinsic value estimate. That made me uncomfortable.
This year, a month after I finished the first draft of this letter, I smiled when I saw in Berkshire’s
2017 Annual Shareholder letter that Mr. Buffett had inserted a chart showing that over four
separate time periods, Berkshire’s stock price had dropped between 37% - 59%. No, markets
are not always efficient.
In a fickle market, a short-term stock price at a specific point in time is not our motivator, driver
or barometer. The scorecard that motivates and drives our team is the number of loving,
responsible pet owners we are helping budget for the veterinary care their pet deserves if/
when their pet becomes sick or injured. The number of veterinarians and their staff who have
the confidence to initiate conversations about Trupanion, and ultimately the success of our
Territory Partners, is the barometer we use to gauge our progress and success.
A REMINDER OF THE PROBLEM WE ARE SOLVING, AND WHY WE EXIST
At our core, the problem we are solving is simple. It is very difficult for pet owners to budget for
veterinary expenses if/when their pets become sick or injured. What complicates this problem
is the following (taken from “Top Investors Questions” at www.investors.trupanion.com):
a. Pet owners do not know how to budget for the “average” cost of medical care for
their pets, which varies dramatically by geography and pet breed.
Our cost-plus model is designed to spread the risk evenly within each category of pets.
Our goal is to charge each pet the appropriate amount for their specific circumstances
(e.g., breed, age at enrollment, geography, etc.) so that, in aggregate, the extra
amount paid by lucky pets covers the veterinary costs incurred by unlucky pets. Some
categories of pets tend to be more expensive, on average, than others, and our goal is
to adjust pricing within each category to reflect those differences.
Once we understand the “average” cost for each sub-category, we add 30%, which
results in Trupanion spending 70% of a pet owner’s monthly costs paying veterinary
invoices for pets that have become sick or injured. A Trupanion member should have
TRUPANION | 6
2017 SHAREHOLDER LETTER the same value proposition if one of their pets is $20 per month (e.g., a domestic
shorthair cat in Boise, Idaho) and the other is $200 per month (e.g., an English Bulldog in
Manhattan, NY).
I liken our value proposition to the Costco model, where Costco members inherently
understand that whether they are purchasing a large flat screen TV, a bottle of Bordeaux,
a can of tuna, or a roll of toilet paper, they are always getting the best value.
Compared to Costco, our product is less tangible. This makes it more difficult for the
pet owners to distinguish our value proposition. This is why we work with veterinarians
and their staff.
b. Pet owners don’t know whether their pet will be “average,” “lucky” or “unlucky,” so being
able to budget for the “average” is not an effective solution for an individual pet owner.
As noted above, we spread the risk among thousands of pet owners so that, in
aggregate, the extra amount paid by lucky pets covers the veterinary costs incurred by
unlucky pets.
Said another way — any pet owner could get a quote for their specific breed or
location and multiply their monthly quote by 70% to determine the average monthly
veterinary costs for accidents and illness. They could put this money in a piggy bank
every month, revisit it annually to understand the impact of inflation and utilization in
their geographical area, and follow this pattern for their pet’s entire life. If their pet ends
up being “average,” they will have zero money in their piggy bank at the end of their
pet’s life.
The problem with this piggy bank approach is that nobody knows whether their pet will
be “average,” “lucky” or “unlucky.”
c. Even if a pet ends up being “average” over its life, the timing of its accidents and
illnesses may not align with its owner’s budgeting approach.
To an informed, responsible and loving pet owner, Trupanion is a hedge (that costs them
30%, if their pet ends up being “average” over its entire life) that helps them budget for
the unexpected cost of veterinary care if/when their pet becomes sick or injured.
Aided by the problem we are solving, our large under-penetrated market, and a business
model based on direct-to-consumer, monthly-recurring revenue, we achieved the growth
depicted below:
TRUPANION | 7
2017 SHAREHOLDER LETTER In the 2015 shareholder letter, I discussed an area that needed improvement: “While we
are excited about the new additions to our team in 2015, we could have done a better job
training them. Our company is unique, and it takes time to understand what we do. We can
serve our new colleagues better if we spend more time up front educating them on our
business as a whole.”
I am happy to inform our shareholders that 2017 was a year of education at Trupanion. We
invested $3.1 million or 1.3% of revenue in what we call TruUniversity, our training program.
What this team has accomplished, building it from scratch, with little resources and no
playbook, is impressive. In 2017, every new and existing employee and Territory Partner
attended TruUniversity. Yes, like anything that is new, with hindsight we could have done some
things better, but in the culture of WD40 we will iterate and keep improving. There is no doubt
that we are making progress.
Last year at the annual shareholder meeting we introduced our 5 key long-term initiatives.
They remain unchanged. Here is my scorecard on our progress in 2017:
I. AOM EXPANSION
Decent progress, was hoping for a little more
II. INCREASE
CONVERSION RATES
Phone conversion rates were a definite A! Very cool. Unfortunately, our web
conversions did not make enough progress early in the year and fell short
of our goals.
III. AUTOMATED CLAIMS
Very close to going live in 2017. We will take it because it is an important
part of our future and really, really hard to accomplish!
IV. SAME-STORE SALES
A total grind, testing all year BUT with massive rays of sunshine at the end of
the year, giving us confidence that we are learning some new skills.
V. NIRVANA
Some progress on retention, but we won’t be celebrating with margaritas
on the beach this year.
B+
B
A-
B+
C+
We ended 2017 with 107 Territory Partners visiting approximately 20,000 unique veterinary
clinics. In total, we estimate that we made an additional 85,000 face-to-face visits during the
year, and in aggregate have made over half a million such visits since we entered the US
market in 2008. By the end of 2017, we had Trupanion Express™ in more than 2,000 clinics, and
$40.4 million dollars of veterinary invoices were paid directly to veterinarians — an increase
of 34% over the prior year. We will provide more insights into these metrics at the annual
shareholder meeting on June 7th, 2018 in Seattle.
EVERY YEAR THERE ARE THINGS WE SCREW UP AND THINGS WE LEARN THE HARD WAY.
HERE IS MY LIST THIS YEAR:
a. I slow down the team and hurt our alignment when I poorly describe why something is
important to the organization.
b. We made some progress on Nirvana, but we need more.
In short, 2017 was better than 2016 but only had us return to 2015 levels. As a reminder,
our Nirvana goal is to have our existing members add pets or refer friends at a level
that equals, and thus counteracts, our monthly churn rate. Our monthly churn rate for
the last 10 years was approximately 1.5% per month. For the last few years, our churn
has been 1.4%. Our referral and add a pet, which we also measure as a percentage
of our total members, was 0.7%, so our gap to Nirvana was 0.7%.
TRUPANION | 8
2017 SHAREHOLDER LETTER c. I believe we are spending money on things that our members do not care about.
A simple example would be postage — we spend too much money on snail mail.
In 2014, I stated, “The best subscription companies have a high cost of goods, an
exceptional member experience, and the lowest frictional costs.” We must be focused
on eliminating all frictional costs. This needs to be our version of frugality, and it is
currently not a part of our collective DNA.
d. We need to be better at trusting one another.
This is a prerequisite for innovation, nimbleness and ultimately, growth. Frequently, we
agree on the “where” and the “what,” but we have too much cynicism on ideas
around the “how.” More encouragement is needed.
e. Some of our team members do not have a clear path to higher compensation if they
stay in their same roles.
We actually made great progress around this issue across the organization this year,
just not everywhere. We need to fix this!
In my opinion, the positive learnings and observations outnumbered the negative this year.
Here are the ones that stick out in the positive column:
a. I have sat in the call center for many years and it gives me the opportunity to feel and
hear the voices of our customers and it is the intersection of our wins and failures. You
can probably imagine that sitting close to me in the call center has its pros and cons.
As a result, the team often moves around me. Over the years, this has provided me
the opportunity to listen to tens of thousands of calls from dozens of team members.
This year I received a new neighbor and had the honor and privilege of listening to the
exceptional way she serves our members. It’s one of the best parts of my day.
The call center has been under a lot of stress in 2017 with turnover that was too high!
Through it all, my neighbor just rocked it. I could not be more proud. Near the end of
the year, she began to train and help others, giving me confidence in improvements
we will see in the coming years.
b. Our expanding data team achieved further progress in accurately pricing our
sub-categories.
The results could be seen in the growth of both our ARPU and Lifetime Value of a Pet
(LVP). As stated previously, ARPU increased 9% year over year, which was a short-term
3% to 4% more than what we otherwise expect on an ongoing annual basis. But it is
the LVP’s growth that is the true long-term beneficiary of this accomplishment. Our LVP
increased from $631 to $727, showcasing continued improvements and exceeding
our stated goal of decreasing the number of sub-optimized categories from 17% to
8%. Remember, a higher LVP and the continued expansion in our Adjusted Operating
Margin allows us to increase our target pet acquisition costs while maintaining or
improving our expected IRR on acquisition spend.
At our core, accurately pricing by sub-category is one of our most important abilities,
but it is only the first half of the story. The second half is lining up what we spend on
TRUPANION | 9
2017 SHAREHOLDER LETTER leads and conversions to ensure that we deploy our capital in line with our targeted
IRR. The team really crushed it in 2017. As the marketing team began to tap their foot
on the accelerator, the analytics team was sitting shotgun, acting as a great co-pilot.
I believe the work and learnings from our analytics team in 2017 will pay dividends for
the next 3-5 years as we learn how to deploy greater sums of our adjusted operating
profits to enroll more pets.
c. 2017 saw a change in the direction and name of our Human Resources team.
This team had always been tasked and funded as a recruitment arm of the company.
We expanded the focus of this team to include many of the functions that our people
deserve, and rechristened the team “People Operations” to better align with our
culture.
d. The finance team drove deeper understanding of how each department and its
functions work together to drive positive growth in our intrinsic value.
Similar to the impact of the data team, I believe what the finance team
accomplished by using our intrinsic value model to drive behavior, focus and
investments will have a compounding impact over the decades ahead of us.
e. I believe that we are beginning to do a better job selecting and aligning ourselves
with long-term strategic partners.
We live in a world that crosses emotions, empathy, customer service, science, data,
healthcare, regulations, and technology. The commonality is people. We are also
learning that with stronger relationships with the individuals and personalities within
our ecosystem (this could include business partners, vendors, fellow animal health
companies, or individuals from the department of insurance), we are able to find
common ground around our mission of helping pets receive the best veterinary care.
This mission resonates with most of humanity — got to love the bond we all have with
our pets!
f.
In writing this years’ letter, I nearly forgot to highlight the efforts of our claims team.
Reflecting on why the claims team was not on my radar, I have determined that it was
because it just ran so smoothly.
The team paid over 700,000 veterinary invoices in 2017! They worked hard every day
of the year, 24 hours a day, including New Year’s day, Christmas day, and every snow
day — all while paying faster and faster, driving us closer to our goal of paying 90% of
invoices directly to the veterinarian within 5 minutes. The team rallied behind our efforts
to learn more about automation, understanding how this will better the lives of pet
owners and veterinarians. They accomplished all this while the department’s annual
turnover was less than 10%. A large locomotive running down the tracks is often
overlooked, but its effectiveness is truly impressive. Well done team!
g. In my opening comments, I mentioned that some of our most interesting learnings
occurred in the back half of the year when our Pet Acquisition team (aka Sales
& Marketing) began to tap their foot on the accelerator. I will let the shareholder
meeting be a forum for most of our sharing in this area, but will summarize for you here.
TRUPANION | 10
2017 SHAREHOLDER LETTER In the back half of the year, we spent more aggressively in direct-to-consumer
advertising in a few select markets. The second primary area of increased spend
was focused on same-store sales, where we endeavor to learn how to have existing,
active supportive hospitals more effectively and consistently introduce Trupanion to
their loving, responsible pet owners. The results of these efforts showed little impact
on the number of quality leads for the year, but did result in a modest 4% increase in
conversion rates. Most of that increase showed up in the back half of the year with
conversion rates up 7.5%. We were encouraged by these results.
In the 2015 shareholder letter I stated, “I remain committed to updating you on our progress
toward our goals.” One of our key goals since becoming a public company is achieving
operational scale, which we define as having our adjusted operating profit margin at 15%.
This is the profit we have from our existing clients before we spend more to add new pets. We
said we would achieve this goal by spending 70% of revenue paying veterinary invoices (our
cost of goods sold — COGS), 10% of variable expenses servicing our members and 5% on
fixed expenses. In 2014, we said this might be ambitious, but we thought we could achieve
this goal when we have between 650,000 and 750,000 pets. We also said we hoped to
achieve this by the end of 2020. As we get nearer to the end of 2020, here is my update:
1.
2.
3.
I remain confident we will hit our 15% target AOM when we have between 650,000
and 750,000 total enrolled pets.
I believe the expansion in our adjusted operating profit should be sufficient to pay for
our desired growth in 2018, 2019, and 2020.
I am not yet confident in predicting our ability to cost-effectively add enough pets to
have 650,000 pets by the end of 2020.
Before I can become confident about where our pet count will likely be by the end of 2020,
we will need some more time for our Pet Acquisition team to fine-tune our ability to spend
increasing amounts of available money. In a perfect world we would spend 70% of our PAC
spend on reliable “core” lead and conversion methods that return us a 35% to 40% IRR. We
would spend 20% of our PAC on “growth” areas where our IRR is between 5% and 25% as
we are trying to optimize better leads or increase the conversion rates so we can hit our
long-term IRR targets of 30% to 40%. The last 10% of our PAC spend will be on new “test”
initiatives where we have no real idea what the results will be and therefore we will need to
dynamically watch the results to determine if we move forward or stop the initiative.
In 2016, driven by our desire to be cash flow positive, and because our LVP was lower than
we had previously anticipated, we spent approximately 95% of our PAC on core channels
and conversion tools. In 2017, particularly in the back half of the year as our LVP and AOM
both increased, we began to spend a higher percentage of our PAC dollars on “growth”
and “test” initiatives. In 2017, our PAC spend was roughly broken-down as follows: 75%
core, 15% growth, and 10% test. Please keep in mind that core and growth channels may
have diminishing returns as we apply more volume, so we must continuously monitor the
relationship of our target PAC spend to our LVP by each sub-category.
In the coming years, we expect that our adjusted operating income will continue to expand,
giving us significantly more capital to spend on acquiring new pets while remaining cash-flow
positive. Additionally, expansion in our adjusted operating margin, coupled with increasing
TRUPANION | 11
2017 SHAREHOLDER LETTER LVP would enable us to increase our allowable PAC spend, while maintaining our IRR hurdle
rates and providing us with plenty of growth opportunities.
The table below is an illustrative example of what it may take to achieve 650,000 total
enrolled pets by 2020, assuming ARPU growth of 5-6% and our current retention rates. We do
not intend this to be a projection or guidance, but rather an illustrative example of a path
to reaching this milestone. Our ability to spend increasing adjusted operating income each
year at a higher PAC will determine how quickly we are actually able to reach 650,000 total
enrolled pets. We are not able to predict the future, but this discussion and the table shown
below highlight both our opportunity and our challenge. Can we deploy greater sums of
capital and get the results we desire? My answer: I simply don’t know yet; it will have to play
itself out.
TABLE 4 – THIS IS INTENDED AS AN ILLUSTRATIVE EXAMPLE OF WHAT THE PATH TO 650,000 TOTAL ENROLLED
PETS MIGHT LOOK LIKE. THIS IS NOT A FORECAST, PROJECTION, OR GUIDANCE, NOR IS IT MEANT TO SHOW
THE ONLY POSSIBLE PATHWAY TO REACH 650,000 TOTAL ENROLLED PETS.
YEAR
2017
2018
2019
2020
AOM %
Approx AOI
IRR
PAC per pet target to
hit the IRR of 36%
New Pets enrolled to
end with 650,000
PAC spend if we hit IRR
target and new pet
target
9.6%
11.5%
13%
14% (15% 12/20)
$23,400,000
$30,000,000
$40,000,000
$50,000,000
36%
$152
36%
$190
36%
$200
36%
$210
105,180
130,000
160,000
180,000
$18,400,000
$24,700,000
$32,000,000
$37,800,000
Total enrolled pets
423,194
500,000
585,000
650,000
Several months ago I introduced to the team the Japanese term “Kuyashii.” For those
doubters out there we say, “Thanks for inspiration; Kuyashii!”
OUR MISSION
We talk about being mission-driven, and that helping pets receive the best veterinary care is
why we come to work.
We talk about our vision — being the world’s authority in medical insurance for cats and
dogs. We talk about culture and alignment. In short, we agree with Peter Drucker that culture
eats strategy for breakfast. Human beings want to be connected to something bigger than
themselves, and they want be a part of something that makes them feel good.
Pets provide us with unconditional love and we, as responsible, loving pet owners, want to
take care of them the best way we can. This is what drives us!
The team was recently forwarded two correspondences from a Trupanion member. I think it
captures these concepts better than I could ever articulate.
TRUPANION | 12
2017 SHAREHOLDER LETTER From:
Sent: October 18, 2017
To:
My TruStory
Subject:
Good evening,
It has taken me a long time to send this email, and I have to apologize that I haven’t
sent it earlier... We are still reeling from losing Jake this summer, and I am always thinking
about how much I need to thank you for everything that you have done for us.
Jake came into my life unwelcomed. I had been fortunate to have the experience
of sharing 16 years of my life with the perfect dog — a Jack Russell; I got him when
I was 18, and my entire adult life was with him by my side. Even at 16, he was
unstoppable. And then he met his match and was diagnosed with an inoperable
tumour in his chest. Within days, he was gone, and I was alone. I had decided that he
was THE dog, MY dog, and there was no way I could ever consider having another. I
had already had my dog.
Then, I learned of Jake. He had been surrendered to the vet to be euthanized
because he was so difficult. He was desperate for a home. He had endured four
homes in two years, and he was a chronic runaway, filled with anxiety. I said no. I had
already had my dog. Months and months went by, and Jake entered my life again.
Time was running out for him. I said no. Several months later, the offer came again. I
decided that the best way to end it once and for all was to take him for a weekend
trial, show that he wasn’t a good fit for me, and then it would be resolved. I picked
TRUPANION | 13
2017 SHAREHOLDER LETTER
him up for the weekend and put him through every test I could think of. He came
to the barn so I could assess him around horses. We went for drives and walks and
encountered other dogs. The final test was children. I brought him to meet my three
year old niece. I will never forget the moment I looked out the window to see my
niece pulling Jake behind her in a wagon. And he was wearing a bonnet. I remember
thinking in that moment that I had never seen a dog try harder, and even my perfect
little dog wouldn’t have endured such embarrassment. And that was the moment that
Jake became mine.
With that said, he was never truly mine. He was a free spirit, never really feeling like
he had a home. He struggled with separation anxiety. He made his own rules. The
honeymoon period wore off very quickly, and I learned that Jake believed in trying
hard…to do the wrong thing. He lived by one rule, and one rule only: Look at
every single situation and ask yourself, “How can I make this worse?” He ran away
constantly. He once leapt out the car on Whyte Ave and ran through traffic. He
pooped in my lunch box. When you called him, he would make eye contact to let
you know he heard you, and then went the other way. He ate well placed holes in
any piece of clothing accidentally left on the ground. He snored so unabashedly we
nicknamed him “Darth Jaker.” He peed on any bag, any piece of plastic, anything
he could use as an excuse to break the rules. He would wait for you to finally sit down
and put your feet up, and then immediately whine to go outside. My favourite Jake
moments involved him stranded on the dining room table (after scrambling up to
forage for food), and peeing down the heating vents in the house.
For years, I have described Jake as being hard to love. I work with teenagers, and we
often say that those in need of love are often the hardest to love. The same applied
to Jake, and in moments when my patience waned, I reminded myself how much of
a deficit of love he had in his life, and he needed to know that no matter what he did,
we would still love him. He was a source of endless stories with his attempts to be the
worst dog ever.
It was difficult when Jake was diagnosed with diabetes. The veterinarian immediately
started to describe the option of euthanizing him, as that is what most people do
when faced with the endless bills associated with ongoing treatment. I can’t thank
you enough for supporting us in moving the opposite direction — towards daily
needles and insulin and testing. We set off on our journey to treat Jake for the rest of
his life. And we thought that we had it under control.
We went on vacation in August with our whole extended family, meaning that the
dogs were going to a boarding facility. And while we were away, the worst case
scenario occurred when Jake suffered several diabetes related complications. It
was my worst nightmare to be in another country, and not be there for Jake. We
had to make decisions without being there, but we knew that we could send him to
Guardian Vet, seek treatment and support, because he had Trupanion. Guardian Vet
was amazing as well, stabilizing Jake, and we flew home to see him.
I still struggle when I think about those days, and my poor Jake. He suffered
significant irreparable neurological damage as a result of the diabetes, and I came
home to a different dog. He was stable, but he lost his vision and did not recognize
TRUPANION | 14
2017 SHAREHOLDER LETTER us or our other dog. He lost all those infuriating personality traits and all of his
idiosyncrasies. Worst of all, he no longer looked at every situation and asked himself,
“How can I make this worse?” And it was at that moment that I realized he was never
hard to love. He had stolen my heart. And when we lost him, we lost all of the good
stories in our house, all of the ridiculous laughing and fun, and all of his crazy energy.
In the days and weeks and months that followed, he was on my mind constantly. I
was seeking out anyone who wanted to think about him with me, share stories about
him with me, and keep him in our lives as much as if he was still alive. I cried when I
received his reimbursement cheque from Trupanion, with a kind note acknowledging
our loss. And I was moved to receive an email letting me know that his policy had
been terminated without me needing to initiate the process. That is an incredibly
thoughtful service to provide for those of us who have lost a family member. But
then, I opened a card from Trupanion, and I was blown away by the kind words and
signatures of all the people who cared about Jake. This poor dog came from a place
of having no one who loved him enough to stay by his side, and throughout his entire
life he tested people as if to prove that they would give up on him and pass him along
to someone else.
Thank you for sticking by his side and loving him,
This email was shared with the claims department, and most were in tears. They asked a
claims team member (and aspiring artist) to paint a picture of Jake from one of the photos
She sent along in her thank you note. He captured Jake brilliantly. She received the painting,
along with a card signed by the team. She then sent the following message:
I came home from work today to find a package on
my doorstep. I was surprised and confused to see it
was from Trupanion, and more confused to open it to
see bubble wrap!
There are no words for how incredibly overwhelmed
I am right now. My mind was racing ahead of my
hands as I opened it, realizing it was a frame and
wondering what strange gift Trupanion sends out to
people who get two puppies at the same time (that’s
right...I will explain in a moment). I immediately burst
into tears to see Jake looking back at me.
I am speechless, overwhelmed with awe and
gratitude and thankfulness. It might sound crazy…but
overwhelmed with love for each person who had a
part in this incredible gift. Please please pass on my
love to Andre for bringing Jakey back to life for us…
and for the kind words of Gina, Kathryn, Rei, Main,
Emily, Kortney, Stella, Marissa, and Heather. (And my
apologies for misspelling any names!).
TRUPANION | 15
2017 SHAREHOLDER LETTER I feel like you all exist in an exhausting, stressful, and thankless job, and that many of us
have taken you for granted as we submit claims with fingers crossed. But I can tell you,
without a doubt, that you all have had a profound impact on our lives. Like I mentioned
before, Jake was hard to love at times, and he could count his allies on one paw. But
man…we are feeling the love. Grief is a wily foe, laying low and then coming back with
a vengeance. But it is so powerful to know we are not alone. Thank you for that.
MacGyver and I really struggled in the months following losing Jake, his loss felt 2000
times his actual size. Poor Mac was depressed and we struggled to get him to do
anything, and we struggled to determine the right course of action. He’s an odd duck
as well, and we weren’t sure whether a new dog would be welcomed. He missed his
Jake. Eventually we decided that a new dog was the best route, but after several
months of searching for a new rescue dog with no success, we decided to look for a
puppy. And that might have been when we lost our minds…I found the right puppy
for the job — to be Mac’s friend and be chill, but upon visiting them, Brendon fell in
love with another. It is all Jake’s fault, of course, because just one puppy can not
possibly fill the void left by Jake. So, we got two.
Life is once again filled with the chaos that we were missing. Emerson and Khali each
remind us of Jake in different ways, and we can once again shake our heads at the
bizarre choices being made…like jumping into the shower, opening the back door to let
themselves outside, carrying socks and shoes outside, and of course…there is A LOT of pee.
We didn’t hesitate for a moment when it came to starting policies for each one
of these babies, and that is because of the care, and love, we received from the
Trupanion team.
Thank you, from the bottom of my heart, for the most incredible surprise today, for
Andre’s incredible talents, for Stella’s suggestion that Jake becomes a children’s book,
and for Emily sharing that Jake’s story is printed out on her desk. Please pass on my
condolences to Stella for her loss of Moses, and to Emily for losing her dog as well. I
wish I could do something…like you all have done for me.
Thank you for your big heart and kind words. I would love to meet you in person some
time and give you a hug to thank you for all that you have done. There just aren’t
enough words.
Love,
I believe that over the long run, doing things the right way, for the right reasons, will outperform
all other motivations. We hope to see you at the shareholder meeting in Seattle, June 7, 2018.
— Darryl Rawlings, CEO & Founder
TRUPANION | 16
2017 SHAREHOLDER LETTER
END NOTES
1 In this letter and our other publicly available reports, we present certain non-GAAP measures, including adjusted
EBITDA, variable expenses, fixed expenses, adjusted operating income, adjusted operating margin, and acquisition
cost. These 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 they are not prepared in
accordance with GAAP and exclude expenses that may have a material impact on Trupanion’s reported financial
results. 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. Trupanion urges its investors
to review the reconciliation of its non-GAAP financial measures to the most directly comparable GAAP financial measures
in its consolidated financial statements, and not to rely on any single financial or operating measure to evaluate its
business. These reconciliations are included within our Supplemental Financial Information provided with the Q4 earnings
release on Trupanion’s Investor Relations website.
Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that
can impact a company’s non-cash expenses, Trupanion believes that providing various non-GAAP financial measures
that exclude stock-based compensation expense and depreciation and amortization expense allows for more meaningful
comparisons between its operating results from period to period. Trupanion offsets sales and marketing expense with sign-
up fee revenue in the calculation of net acquisition cost because it collects sign-up fee revenue from new members at
the time of enrollment and considers it to be an offset to a portion of Trupanion’s sales and marketing expenses. Trupanion
believes this allows it to calculate and present financial measures in a consistent manner across periods. Trupanion’s
management believes that the non-GAAP financial measures and the related financial measures derived from them are
important tools for financial and operational decision-making and for evaluating operating results over different periods of
time.
2 The IRR was calculated assuming the new pets we enrolled during the year will behave as an average pet with the same
$727 LVP and 9.6% adjusted operating margin (AOM) as our overall subscription pets achieved in 2017.
DISCLAIMER
This letter 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 letter
other than statements of historical fact, including statements regarding lifetime values of a pet, discounted cash flows and
our intrinsic value model, future results of operations and financial position (including ARPU, AOM, AOI, IRR, PAC, and new
pets enrolled), our business strategy and plans and our objectives for future operations, are forward-looking statements. The
words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “model,” “plan,” “potentially,”
“predict,” “project,” “target,” “will,” “would,” 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
under the heading “Risk Factors” in our Annual Report on Form 10-K and other filings we make from time to time with the
Securities and Exchange Commission. 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 letter 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.
TRUPANION | 17
2017 SHAREHOLDER LETTER
2014 Shareholder Letter
2014
TO OUR SHAREHOLDERS
As this is our fi 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. Our plan now includes
achieving free cash fl ow positive by the end of Q2 2016. In the next
fi ve years, we plan to achieve scale, which we defi ne as 650,000-
750,000 pets. At scale, our target is to have 5% fi xed expenses and
a 15% discretionary margin from our subscription business (before
sales and marketing), 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. Our constituents include responsible, loving pet
owners; veterinarians and their co-workers; Trupanion Territory
Partners; Trupanion employees; and Trupanion shareholders.
TRUPANION | 19
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 fi rst 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! “...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.’”
The problem Trupanion
is solving
Pet owners in North America spent $55 billion
caring for the 180 million dogs and cats last
year, and that number is expected to increase
in 2015. Responsible, 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 fl 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 $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.
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 profi le of each cat and dog is very
diff erent.
5. Large veterinary invoices now can cost
$10,000, $20,000, $30,000 — up to
$40,000; 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 profi 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 Retrievers,” another is
“dog residing in Santa Barbara,” and a third is
“cats enrolling at the age of six.”
TRUPANION | 20
We do not try to predict the
future. Our 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 (see graph
A).
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.” Our 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.
A
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 diffi cult for any existing or new
company to emulate. This does not mean that our product will
be cheapest in the market; it means that we have the ability to
consistently use a higher percentage of our members’ monthly
subscription fees toward paying veterinary invoices (see graph B
on next page).
To be completely fair and transparent, it is our underlying costs
that are low today. Similar to OpenTable when they went public,
our costs in an existing, established market are low. In new
TRUPANION | 21
“OUR PROPRIETARY DATABASE HAS BEEN BUILT
OVER 15 YEARS USING OVER 7.5 MILLION PET
MONTHS OF INFORMATION AND INCLUDES
OVER 1 MILLION CLAIMS.”
B
One of the biggest diff erentiators for Trupanion is our
unique approach to the market through a fi 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. Over the
last 15 years we’ve made hundreds of thousands of visits with
veterinarians.
At the end of 2014, we had 70 people in the fi eld and we expect
to have 85 by the end of 2015. We ended 2014 with over 6,000
active hospitals, compared to over 5,000 active hospitals at the
TRUPANION | 22
markets, until we reach scale,
the cost of acquiring new pets
will be higher. Likewise, our
fi xed expenses, which include
our G&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’s proprietary
data has given us a unique
advantage in the marketplace.
We have a central team
of analysts of varying
backgrounds (actuary, fi nance,
math, engineering) 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. Our 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 confi dent that
we lead the industry with our
data analytics. Knowing what
I know today, it would take me
over 13 years to replicate our
15 years of data.
C
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 eff ective at creating members
and effi cient from a pet acquisition cost
perspective (see graph C).
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,
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 6,000 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’re seeing improved referral
and conversion rates. Longer term, we also
expect this to aid retention rates (see graph D
on next page).
Data analytics, expansion of our Territory
Partner sales force, and focus on Trupanion
Express™ 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.
TRUPANION | 23
Aligning the interests of all of
our constituents
Responsible, 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 suff er
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 off ered in the traditional
products available on the market.
From day one, I have been dedicated to meeting
these needs and today we off er a superior
product that is inherently diff erent than what
D
TRUPANION | 24
“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 diff erent perception of what “pet insurance” is
— wellness-only coverage, accident-only coverage, an HMO-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 (those things most likely to
happen to a pet), we don’t raise rates because a pet has claims, we
have no payout limits, and we’re eliminating the reimbursement
model with Trupanion Express™. 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
E
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’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 60” fl 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 $33/month for
their cat or $144/month for
their Bulldog, they are getting
the industry’s best deal, for a
product that works, and from
a company they can trust (see
graph E).
TRUPANION | 25
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 diffi cult than
getting into medical school or dental school. Yet
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 26,000
are independently owned. They are extremely
effi 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 HMO-like
models. Having insurance companies drive
the pricing of care or selection of hospital
is not acceptable. They want to serve their
clients’ needs, not waste their time on fi lling
out forms. They know the diff erence 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; 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’s product pays 90% of the
veterinarian’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; this
includes the things most likely to occur to their
pet’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’s practice management
TRUPANION | 26
“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; 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. On an average
day in our Seattle offi ce we will have about 400
employees working alongside 200+ 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.
Our average employee has years of experience
in veterinary hospitals, shelters, doggy day
cares or other related fi 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;
we all have the same size desk and the same
benefi ts regardless of whether we are hourly or
salaried or our tenure with the company. We
want everyone to be fulfi lled and comfortable
being themselves. We have a sign on our wall
that shows the Oscar Wilde quote, “Be yourself,
everyone else is taken” and we take that motto
seriously.
Our values are not something we put on
marketing materials - they are beliefs or traits
that are shared by our community and defi 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. Our values are:
• We do what we say
•
Simple is better
• We do not punish unlucky pets
• We’re innovative and fair
• We love pets!
Our 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.
TRUPANION | 27
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 fi 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 $25,000 each.
Several years later, and before taking on any institutional investors, we agreed to pay $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.
Our commitment to our institutional investors was to take our learnings from our fi rst seven years
in Canada and to create and build a category for medical insurance for cats and dogs in the United
States & 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.
On July 18, 2014 we took Trupanion (TRUP) public on the New York 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’ll
outline them here.
In the negative column, we disappointed
ourselves and others by having a pricing miss
in Q3 & Q4, which was outside of our allowable
tolerance and aff ected 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 confi 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 (an area we began to
fumble in 2012 and 2013), as well as preparing
to take the company public. What I didn’t
account for during this time was the speed
in which the company was able to execute
change in processes. I had a fl 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 fi ve
clear owners of every key metric and line item
TRUPANION | 28
on our profi t and loss and cash fl 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, specifi 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 fl 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-
eff ectively change our growth projection curve,
and it requires additional capital, we will do
what’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 fi 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 signifi 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™ 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 fi rst, it’s important to understand
how we think about our business metrics
internally. We use the old-fashioned cash fl 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 fi xed expenses in the way of
technology and general and administrative
expense (G&A). The remaining cash, before
sales and marketing, is what we term our
“discretionary income.” We can choose to
TRUPANION | 29
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 $119 (pet acquisition cost)
LVP was $590 (lifetime value of a pet)
LVP/PAC was 5.0X
Please note our discretionary income is not
recognized by GAAP accounting or the SEC, but
we certainly are not the fi rst direct-to-consumer
subscription company that thinks about their
business this way. John Malone and TCI (the
cable company) in the late seventies introduced
the investment community to the term EBITDA
when they needed to describe cash fl 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 fl 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’s revenue
forward one month as our members pay on
diff ering days during the month and receive a
month of coverage.
Back to the GAAP accounting and other key
metrics in 2014:
• Revenue was $116M
• AEBIDTA was a loss of (-$10M)
•
Free cash fl ow was (-$16M)
• Adjusted Revenue Per Pet (our version
of ARPU) was $44 per month
• Discretionary income was $3M
All the above key metrics, excluding fl uctuations
in foreign exchange rates, were at or slightly
ahead of analyst consensus.
Notable milestones in 2014
•
2014 showed continued revenue and
pet growth (see graph F on page 14).
• We added 213 people to our home
offi ce team — that is 44% growth over
2013. We also welcomed 67 new pets
to the offi 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 Aff airs.
Through this program, approved
veterans’ 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’s members. This
program shows up in our “Other
Business” section of our P&L.
TRUPANION | 30
• Our 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 York Stock Exchange. Several
team members traveled to New York
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 offi ce partied at home with
champagne and cupcakes. Our stock
opened at $10 per share, and we raised
$82 million.
• We launched our new website — a
robust, fully responsive, world-class
web platform and what we believe
is the best possible ‘front door’ 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 Richard
Galanti, Costco CFO; Howard Schultz,
Starbucks CEO; David Loewe, Seattle
Humane Society CEO; and Kristin
Hamilton, Koru CEO.
• Our Chief Technology Offi cer, Craig
Susen, was awarded the CTO of the
Year Innovator Award.
•
Through our Member Donation
Program, our members donated over
$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.
• Our Child Care Center hosted its
open house. The center is available
to Trupanion employees at no cost,
and serves children aged 6 weeks to
2.5 years. The Child Care Center was
offi cially opened January 5.
• We ended the year with 232,000
enrolled pets, 70 regional sales people
in the fi eld and 6,073 active hospitals.
TRUPANION | 31
F
*All revenue amounts refl ect adjusted revenue, in millions. For a description of how we calculate adjusted revenue, see “Management’s Discussion
and Analysis of Financial Conditions and Results of Operations — Non-GAAP Financial Measures.” Existing Pets/Revenue refl 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 refl 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
Our business model is simple. But the execution
of our business model is challenging. It requires
focus, years of data, and a great team.
Our business model is similar to the cable
industry in the 1960’s, the cellular industry in
the 1980’s, and more recently, two companies
we admire - Netfl 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 X to acquire a new
member and to have the discretionary income
return substantially more than X over the life
of the subscription. Margin percentages are
less important than the amount of free cash
generated over the life of the subscription. One
TRUPANION | 32
“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 fi 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 fl awed because it does not account for the
cash required to operate our fi xed expenses.
For these reasons, we are most concerned
with the internal rate of return (IRR) for
incrementally adding an average pet. We
calculate the IRR by understanding our cost to
acquire an average new pet and the free cash
fl ows that we anticipate will be generated over
the average pet’s life. We have previously stated
that, at operational scale (650,000 to 750,000
pets), our target fi xed expenses should equal
5%-6% of revenues. If we are able to achieve
a consistent 70% gross margin, 10% variable
expenses and 5%-6% for fi 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 IRR should be in the
neighborhood of 40%-50% (see graph G).
Unfortunately, we do not have a 40%-50% IRR
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 fi xed expenses. That
being said, we believe that these results are
achievable based on our performance in more
mature markets. Lots of execution ahead!
Please remember we have over 1.2 million
price categories where we monitor our PAC/
LVP and therefore our IRR 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
TRUPANION | 33
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. Our 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 off ering 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’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.
Our 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’t relevant to the marketplace, but I’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 fl ow positive in
the next 12 months and achieve scale
in the next fi ve years.
• Multiple of EBITDA is applicable
for many growth companies if the
capitalized portion of the P&L
is similar to other comparable
investments. We do not capitalize our
growth; in fact, we capitalize only
a small portion of our technology
spend today and we expect this will
be reducing as we scale our fi xed
expenses, G&A and technology to 5%-
6% 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 $300 per pet, the
purchase price would be $15 million.
With GAAP accounting, the purchase
would have little eff ect on our EBITDA
and income in the year we purchased
TRUPANION | 34
Deployment of your capital
short-term
Over the next few years we will be deploying
your capital in our foundation, member
experience, growth and scale. Specifi cally, we
intend to invest in:
• Our 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. Our members need to
know that they are always getting the
best deal.
• Cost-eff ectively 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
profi ts. Hold with me… this is where it
gets interesting. If in the same year, we
chose not to purchase the competitor’s
pets for $300 per pet, but instead
grew organically by 50,000 pets at
$150 per pet, our EBIDTA or income
would have a -$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 $150 a pet vs. paying
$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 fl 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 fl 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.
TRUPANION | 35
“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 IRR to
determine if adding an incremental pet is the
best use of our shareholders’ money. With
the North American market penetration at
approximately 1%, while Western Europe
ranges between 5% and 25%, we have decades
of runway ahead. Remember, at our average
revenue per pet, every 1% of penetration equals
about $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 signifi cantly
below our discounted cash fl ow value, we could
re-purchase shares. These are theoretical
scenarios; 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 CEO says they have a great team. Instead
of me saying it to you, I invite you to visit our
Seattle offi ce so you can meet them yourself,
experience our environment, and hang out with
our 200+ dogs and a few fearless cats.
It’s also important to me to call out Dan
Levitan. Dan is the co-founder of Maveron, the
preeminent consumer-focused venture capital
fi 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, Netfl ix, Pandora,
OpenTable, TCI, and Starbucks - thank
you for being an inspiration.
• Veterinarians and your staff : thank
you for believing and trusting that we
could be diff erent.
• Our employees who live and breathe
our values, passionately serve our
members, and have the confi dence to
be themselves at work.
• Our 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.
Our 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.
TRUPANION | 36
For those truly long-term investors who have not purchased TRUP, 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,
Darryl Rawlings, Founder & Chief Executive Offi cer
TRUPANION | 37
2017 Annual Report on 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, 2017
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)
6100 4th Avenue S, Suite 200
Seattle, Washington 98108
(855) 727 - 9079
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.00001 par value per share
Name of Exchange on Which Registered
NASDAQ Stock Market LLC
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
Accelerated filer
Non-accelerated filer
(Do not check if smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2017, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $521,061,388 using the closing price on that day of $22.38.
As of February 7, 2018, there were approximately 30,128,277 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 2018 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, 2017.
TRUPANION, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2017
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 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
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
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, Financial Statement Schedules
Form 10-K Summary
Signatures
Exhibit Index
Parent Company Financials
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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.
Item 16.
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 “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 medical insurance 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 insurance 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, based
on our desired return on investment.
Our target market is large and under-penetrated. 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 total pets enrolled grew from 31,207 pets on January 1, 2010 to 423,194 pets on
December 31, 2017, which represents a compound annual growth rate of 39%.
Total Revenue by New and Existing Pets Enrolled
(in millions)
It is very difficult for pet owners to budget for their pet becoming sick or injured when pet owners don't know whether their
pet's health will be average, lucky, or unlucky, and the cost of medical care varies dramatically by geography and pet breed. A
pet owner budgeting for average medical care costs is not an effective solution for an unlucky pet. Additionally, the timing of
accidents or illnesses may not align with the owner's budgeting approach. Our cost-plus model is designed to spread the risk
evenly within each category of pets. Our goal is to charge each pet the appropriate amount for their specific circumstances (e.g.,
breed, age at enrollment, geography, etc.) so that each pet receives the same value proposition, and, in aggregate, the extra
amount paid by lucky pets covers the veterinary costs incurred by unlucky pets. To an informed, responsible, and loving pet
owner, Trupanion is a hedge to help them budget for the unexpected cost and variable timing of necessary veterinary care.
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We provide our members with a high-quality medical plan for the life of their cat or dog. Our product is simple, fair, and covers
all unexpected illnesses and injuries, including those that are most likely to occur with particular breeds of pet, which other
insurance providers may label as congenital or hereditary conditions. We pay 90% of actual veterinary costs if a pet becomes
sick or injured, including all diagnostic tests, surgeries, and medications. In general, only certain taxes, examination fees, and
medical issues existing prior to enrollment are not included. Once enrolled in our subscription, we pay for the veterinary costs
for the pet's entire life, and pet owners are free to use any licensed veterinarian in the United States and Canada, including any
referral or specialty hospital. We aim to pay veterinarians directly, within five minutes of the veterinary invoice being created
and prior to the pet owner checking out, eliminating the traditional reimbursement model and providing our members the
convenience of not having to pay out of pocket or confirm treatment.
Veterinarians are able to recommend treatment to Trupanion members without having their decisions dictated by costs or the
financial burden of the pet owner. Veterinarians, as a result, are able to establish stronger relationships and better alignment
with pet owners who are protected by Trupanion. Our members tend to visit veterinarians more frequently and select the best
course of treatment for their pet regardless of cost.
We generate revenue primarily from our members' subscription fees. Fees are paid at the beginning of each subscription period,
which automatically renews on a monthly basis. 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 98.5% average monthly
retention rate since 2010. 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
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, 2017 was $242.7 million, representing a compound annual growth rate of 44% 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, 2017,
we had a net loss of $1.5 million and our accumulated deficit was $82.8 million at December 31, 2017.
Our Strategy
We are focused on attracting and retaining members by providing a best-in-class value and member experience by focusing on
the following strategies:
Increase the number of referring veterinary practices. We intend to increase the number of veterinary practices that are
actively introducing Trupanion to their clients.
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 believe that it is critical to our long-term success that existing
members add a pet or refer their friends and family to Trupanion, so we focus on improving the member experience. For
example, Trupanion Express® is designed to directly pay veterinary invoices, eliminating the reimbursement model and
transforming the payment process to simplify the administrative hassle for our members.
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 in generating 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, based on our desired return on investment.
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, our
wholly-owned insurance subsidiary, American Pet Insurance Company, has partnered with unaffiliated general agents offering
pet insurance products since 2012.
4
Sales and Marketing
Marketing to Veterinarians
Veterinary practices represent our largest referral source, and combined with referrals from members, accounted for
approximately 76% of our leads in 2017. Our Territory Partner model was designed to facilitate frequent, in-person, face-to-
face communications with veterinarians and their staff about the benefits of Trupanion and high-quality medical insurance for
the life of a pet. The most important job of a Territory Partner is to build strong relationships with each veterinarian hospital, so
the staff can trust and recommend Trupanion. Alignment with veterinarians is critical for a positive member experience, long
term retention, and pet owner referrals. We strongly believe that earning the trust of veterinarians and their staff is the first step
to successfully capturing more of the North American market.
The current market for veterinary services is highly fragmented and includes many sole-owner veterinary practices and small
veterinary practices that are difficult to reach. We believe that no pet insurance company has a referral group that compares in
scale to our Territory Partners and that it would be extremely difficult, costly and time consuming to replicate. Our Territory
Partners are independent contractors who market our product and are paid fees based on activity in their regions. We believe
this 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 Trupanion to veterinarians, veterinary affiliates
(including purchasing groups and other veterinary membership organizations), corporate employee benefit providers,
and shelters and breeders so they can inform their clients on the benefits of Trupanion. For the year ended
December 31, 2017, 67% of our new pet enrollments were generated from these third-party referrals (excluding
referral from existing members).
• Referrals from existing members. For the year ended December 31, 2017, 26% of our new pet enrollments were
generated from existing members adding a pet or referring their friends and family.
• Online. We believe many of our members spend some time researching options before deciding to purchase our
subscription. 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.
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
insurance 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 Trupanion is a better
alternative to self-funding.
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. These include: a superior value proposition for pet owners due in part to our vertically integrated structure that
reduces frictional costs, a unique member acquisition strategy that we have developed using Territory Partners, a proprietary
database containing historical data since the year 2000 that provides actionable data insights, a powerful technology
infrastructure, and an experienced management team.
5
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 partners, and confidentiality agreements with third parties, such as
service providers, vendors, individuals and entities that may be exploring a business relationship with us. We also rely on a
combination of intellectual property rights, including trade secrets, patents, copyrights, trademarks, and domain names to
establish and protect our intellectual property. We seek to protect our proprietary position by filing patent applications in the
United States and in jurisdictions outside of the United States related to our technology, inventions, and improvements that are
important to our business. We additionally rely on data and market exclusivity, and patent term extensions when available. Our
ability to protect and enforce our intellectual property rights is subject to risk and may adversely impact our business.
Employees
We highly value our company culture. We are a mission-driven company and attract employees that share our passion for pets.
Our culture enables our employees to channel that passion collectively toward our goals and is key to our success. As of
December 31, 2017, we had 523 employees.
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 insurance 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.
State insurance regulators have broad authority with respect to all aspects of the insurance industry, including the following:
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licensing to transact business, and approval and issuance of certificates of authority;
revoking or suspending previously issued certificates of authority;
assessing the officers and directors to ensure a minimum level of competency and trustworthiness;
licensing of individual producers and agents and business entities marketing and selling insurance products;
licensing of claims adjusters and third-party administrators;
penalizing for noncompliance with respect to licensing requirements and regulations;
admitting assets to statutory surplus and regulating the nature of investments;
regulating premium rate levels for the insurance products offered;
approving policy forms;
regulating claims practices; and
establishing reserve requirements and solvency standards.
Regulators also have broad authority to perform 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, discussion and correction of an identified
problem, or obtaining a better understanding of how the company is operating in the marketplace.
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.
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In Canada, our medical insurance 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, we retain any financial risk associated with our
Canadian business. Effective January 1, 2015, these agreements were restructured to include our segregated cell business,
Wyndham Segregated Account AX (WICL), located in Bermuda. These restructured agreements automatically renew annually,
but may be terminated 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 WICL 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 be after
the payment, 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. The value of its assets must remain greater than the
aggregate of its liabilities, issued share capital, and share premium accounts. Per our contractual agreements with WICL, the
allowable dividend to be paid by WICL is equivalent to the positive undistributed profit attributable to the shares.
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.
7
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 System 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, 2017, 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.
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 insurance to individuals and businesses that cannot find appropriate insurance 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.
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 may be under consideration, are the possible introduction of federal regulation in addition to, or in lieu of, the current
system of state regulation of insurers. There have also been 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.
8
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 or requiring the adoption of minimum information security standards. 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.
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 operate 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
We have two reportable business segments. See Note 12 of our audited consolidated financial statements included in this report
for information about segments and geographic revenue. For financial information regarding our business, see Part II - Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report and our audited
consolidated financial statements and related notes included elsewhere in this report.
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 6100 4th Avenue South, Seattle, Washington 98108, and our telephone number is
(855) 727-9079. Our website address is www.trupanion.com. Information contained on, or that can be accessed through, our
website is not incorporated by reference, and you should not consider information on our website to be part of, this Annual
Report on Form 10-K.
9
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 reports 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.
Investors and others should note that we may announce material financial information to our investors using our investor
relations website, SEC filings, our annual stockholder meeting, press releases, public conference calls, investor conferences,
presentations and webcasts. We use these channels, as well as social media, to communicate with our members and the public
about our company, our services and other issues. It is possible that the information we post on these channels, such as social
media, could be deemed to be material information.
10
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 $1.5 million for the year ended December 31,
2017. Additionally, as of December 31, 2017, our accumulated deficit was $82.8 million. We have funded our operations
through equity financings, borrowings under a revolving line of credit and term loans and, more recently, positive cash flows
from operations. 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
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 and the projected internal rate of return on marketing spend. 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 $19.1 million on sales and marketing to acquire new members for the
year ended December 31, 2017. 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 subscription 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 subscription. 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 operating metrics described in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Key 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
between 2010 and 2017 was 98.5%. If our efforts to satisfy our existing members are not successful or if new marketing
initiatives result in enrolling more pets that inherently have a lower retention rate, 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 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 subscription for a variety of reasons, including perceived or actual
lack of value, delays or other unsatisfactory experiences in how we review and process veterinary invoice payments,
unsatisfactory member service, an economic downturn, increased subscription fees, loss of a pet, a more attractive offer from a
competitor, changes in our subscription or other reasons, including reasons that are outside of our control. 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 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 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 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 subscriptions reflect amounts we expect to pay for a pet's medical care 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 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, and is subject
to variability as actual results may differ from pricing assumptions. If the subscription fees we collect are insufficient to cover
actual costs, including veterinary invoice expense, 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 subscriptions to cover our costs, including veterinary invoice expense, processing costs, 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 subscriptions. The assumptions we make about breeds
and other factors in pricing may prove to be inaccurate and, accordingly, these pricing analytics may not accurately reflect the
expense that we will ultimately incur. Furthermore, if any of our competitors develop similar or better data systems, adopt
similar or better underwriting criteria and pricing models or receive our data, our competitive advantage could decline or be
lost.
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Our actual veterinary invoice expense may exceed our current reserve established for veterinary invoices and may adversely
affect our operating results and financial condition.
Our recorded reserve for veterinary invoices is based on our best estimates of the amount of veterinary invoices we expect to
pay, inclusive of an estimate for veterinary invoices we have not yet received, after considering known facts and interpretations
of circumstances and the estimated cost to process and pay those veterinary invoices. We consider internal factors, including
data from our proprietary data analytics platform, experience with similar cases, actual veterinary invoices paid, historical
trends involving veterinary invoice payment patterns, patterns of receipt of veterinary invoices, seasonality, pending levels of
unpaid veterinary invoices, veterinary invoice processing 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 veterinary invoices that have been incurred but are not yet submitted to us, 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 paying veterinary invoices and the related administration may vary materially from recorded reserves, and
such variance may result in adjustments to the reserve for veterinary invoices, which could have a material effect on our
operating results.
We rely significantly on Territory Partners, veterinarians and other third parties to recommend us.
We rely significantly on Territory Partners and other third parties to cultivate direct veterinary relationships and build
awareness of the benefits that we offer veterinarians and their clients. In turn, we rely on veterinarians to introduce and
recommend Trupanion to their clients. We also rely significantly on other third parties, such as existing members, online and
other businesses, animal shelters, breeders and veterinary affiliates, including veterinarian purchasing groups and associations,
to help generate leads for our subscription. Veterinary referred leads represent our largest member acquisition channel. In the
year ended December 31, 2017, approximately 76% of our enrollments came from referrals from veterinarians and existing
members, as well as people adding pets to their existing subscription.
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 our subscription;
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
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 subscription or be able to
maintain any relationships they may have developed with veterinarians within their territories. Sometimes a single relationship
may be used to cover multiple territories so that a terminated relationship could significantly impact our company. 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 we can provide to veterinarians. If the
scope of our subscription is perceived to be inadequate or if our process for paying veterinary invoices is unsatisfactory to the
veterinarians' clients because, for example, a service is not included in our subscription, member requests for reimbursement
are denied or we fail to timely settle and pay veterinary invoices, veterinarians may be unwilling to recommend us to their
clients and they may encourage their existing clients who have subscribed to stop or to purchase a competing product. If
veterinarians determine our subscription 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 do not directly provide the same direction, motivation and
oversight over Territory Partners as we otherwise could if Territory Partners were our own employees. Further, Territory
Partners may themselves employ or engage others; we refer to these partners and their associates, collectively, as our Territory
Partners. We do not control a Territory Partner’s employment or engagement of others, and it is possible that the actions of their
employees and/or contractors could create threatened or actual legal proceedings against us.
Territory Partners may decide not to participate in our marketing initiatives and/or training opportunities, accept our
introduction of new solutions or comply with our policies and procedures applicable to them, 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.
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
and/or be required to pay withholding taxes, extend employee benefits, provide compensation for unpaid overtime, 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, 2017, we generated 90% of our revenue from subscriptions. In order to continue to increase our membership, we
must continue to offer a 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 to, in turn, enable us to spend more on sales and marketing programs;
• maintain positive relationships with veterinarians and other referral sources, and convince them to recommend our
subscription;
• maintain positive relationships with and increase the number and efficiency of Territory Partners;
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continue to offer a superior value with competitive features and rates;
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accurately price our subscriptions in relation to actual member costs and operating expenses and achieve required
regulatory approval for pricing changes;
provide our members with superior member service, including timely and efficient payment of veterinary invoices,
and by recruiting, integrating and retaining skilled and experienced personnel who can appropriately and efficiently
review veterinary invoices and process payments;
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 or contractual obligations.
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
$22.2 million as of December 31, 2017. 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.
We are also subject to a contractual obligation related to our reinsurance agreement with Omega General Insurance Company
(Omega). Under this agreement, we are required to fund a Canadian Trust account in accordance with Canadian regulations. As
of December 31, 2017, the account held CAD $2.8 million.
Unexpected increases in the number or amounts of veterinary invoices received, or that we expect to receive, may negatively
impact our operating results.
Unexpected changes in the number or amounts of veterinary invoices received, or that we expect to receive, may negatively
impact our operating results. Rising costs of veterinary care and the increasing availability and usage of more expensive,
technologically advanced medical treatments may increase the amounts of veterinary invoices we receive. Increases in the
number of veterinary invoices we receive 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. We may experience volatility in the number of veterinary invoices we receive from time to time, and short-term
trends may not continue over the longer term. The number of veterinary invoices 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 an increase in veterinary invoices and
other new member acquisition activities. A significant increase in the number or amounts of veterinary invoices could increase
our cost of revenue and have a material adverse effect on our financial condition.
Our success depends on our ability to review, process, and pay veterinary invoices timely and accurately.
We must accurately evaluate and pay veterinary invoices timely in a manner that gives our members high satisfaction. Many
factors can affect our ability to do this, including the training, experience and skill of our personnel, our ability to reduce the
number of payment requests made for services not included in our subscription, the department’s culture and the effectiveness
of its management, our ability to develop or select and implement appropriate procedures, supporting technologies and systems,
and changes in our policy. Our failure to fairly pay veterinary invoices, 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 may not identify fraudulent or improperly inflated veterinary invoices.
It is possible that a member, or a third-party actually or purportedly on behalf of the member, could submit a veterinary invoice
which we would then pay that appears authentic but in fact does not reflect services provided or products purchased for which
the member paid. It is also possible that veterinarians will charge insured customers higher amounts than they would charge
their non-insured clients for the same service or product. Such activity could lead to unanticipated costs to us and/or to time and
expense to recover such costs. They could also lead to strained relationships with veterinarians and/or members, and could
adversely affect our competitiveness, financial results and liquidity.
Changes in the Canadian currency exchange rate may adversely affect our revenue and operating results.
We offer our subscription in Canada, which exposes us to the risk of changes in the Canadian currency exchange rates. For the
year ended December 31, 2017, approximately 20% 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.
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 insurance for their pets. We are focused primarily on expanding our share of the overall
market, and we view our primary competitive challenge as educating pet owners on why our subscription 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. 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 or take other actions to mimic the efficiencies from our vertically-integrated structure or 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 our
member service levels, 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,
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 subscription 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 our subscription, including its perceived value, 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 our product;
the quality of and changes to the consumer experience when speaking with us on the phone or using our website;
regulatory requirements, including those that make the experience on our website cumbersome or difficult to navigate
or that hinder our 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
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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 direct-to-consumer 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 subscription on our website or by calling 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.
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 subscription;
quality of service provided, including the fairness, ease and timeliness of reviewing and paying veterinary invoices;
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.
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Our business depends on our ability to maintain and scale the infrastructure necessary to operate our technology platform
and could be adversely affected by a system failure.
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, systems for managing veterinary invoice payments, customer relationship
management system, contact center phone system and website. We use these technology frameworks to price our subscriptions,
enroll members, engage with current members and pay veterinary invoices. Our members review and purchase subscriptions
through our website and contact center, and we receive and pay veterinarian invoices directly through Trupanion Express®. 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.
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 expect to 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 expect to continue to make, significant investments in these new solutions and
enhancements. For example, we have made significant investments in Trupanion Express®, 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. 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 increases in the
number or amounts of veterinary invoices received) generated by our new business, which could prevent us from becoming
profitable and could impair our ability to compete effectively for business. Additionally, we have in the past, and may in the
future, experience increases in 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.
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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;
the effectiveness of our sales and marketing programs;
our ability to improve veterinarians’ and other third-parties’ willingness to recommend our subscription;
the timing, volume and amount of veterinary invoices and the adequacy of our related reserve;
our ability to accurately price our subscription and achieve required regulatory pricing approvals;
regulatory limitations or other constraints on our ability or our willingness to implement pricing changes;
the level of demand for and cost of our subscription or competing products;
fluctuations in applicable foreign currency exchange rates;
the perceived value of our subscription to veterinarians and pet owners;
spending decisions by our members and prospective members;
our costs and expenses, including pet acquisition costs and costs to pay and process veterinary invoices;
our ability to expand the scope and efficiency of our Territory Partner group;
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 subscription tends to 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.
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Our vertical integration may result in higher costs.
We manage all aspects of our business, including operating our own insurance subsidiary, implementing our own national
independent referral group of Territory Partners, pricing our subscriptions with our in-house actuarial team, processing and
paying veterinary invoices, operating our own contact center and owning our own brand. While we believe this vertically
integrated approach reduces frictional costs and enhances members' experiences, third-party providers may, now or in the
future, be able to replicate this 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 insurance 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 insurance will grow over time if consumers are
offered a high-value product, the market in North America has been historically growing slowly, if at all, 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 insurance 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.
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.
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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;
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our strategic partners may not be successful in creating leads;
• we may be unable to convert leads from our strategic partners into enrolled pets;
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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
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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 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.
For example, we have written pet insurance policies for general agents since 2012. These policies are subject to materially
different terms and conditions than our subscription. Further, the unaffiliated general agents administer these policies and
market them to consumers. For the year ended December 31, 2017, premiums from these policies accounted for 8.0% of our
total revenue. These relationships can be terminated by either party and, if terminated, would result in a reduction in our
revenue to the extent we cannot enter other relationships and generate equivalent revenues with different general agents. In
addition, the general agents control trust accounts they maintain on our behalf. If the general agents make 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. 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 veterinary
invoice expense through an agency agreement and a fronting and administration agreement. These agreements 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
subscription, 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 provide a management report on the internal control over
financial reporting, which must be attested to by our independent registered public accounting firm to the extent we no longer
qualify for the exemption provided to an emerging growth company, as defined by The Jumpstart Our Business Startups Act of
2012 (the JOBS Act).
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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, we are unable to comply with the requirements of Section 404 in a timely manner, we 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 data on
veterinary invoices received 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 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.
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 subscription, including information relating to subscription
fees, benefits, exclusions, limitations, availability and medical plan comparisons. A significant amount of both automated and
manual effort is required to maintain the 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 subscription. 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, 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 subscription fees, 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.
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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. Moreover, a vendor could fail to process
payments, or could process payments in the wrong amounts, which could result in us failing to collect premiums, could result
in increased cancellations and could adversely affect our reputation.
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, or other payment card
operating rules. Any 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.
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. 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.
We currently hold several registered trademarks, including “Trupanion”. Trademark protection may not always be available, or
sought by us, in every country in which our subscription is 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.
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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 subscription, 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 partners, 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.
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 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.
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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 investigations by state insurance regulatory agencies and threatened or
filed lawsuits by, among others, government agencies, employees, competitors, current or former members, or business
partners.
We cannot predict the outcome of these 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.
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, permit withdrawals from APIC (with certain
exceptions) and conduct operations in certain of our Canadian subsidiaries. Our credit agreement also contains certain financial
covenants, including having APIC maintain statutory capital and surplus at all times of not less than the greater of the amount
required by regulatory statute 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 $0.6 million in our account at Western Alliance Bank (WAB) and/or
WAB affiliates and other cash or investments of $1.4 million in our accounts at Pacific Western Bank (PWB); maintaining all
of our depository and operating accounts at PWB and/or WAB; maintaining certain investment accounts at PWB and/or PWB
affiliates; achieving certain quarterly revenue levels and claims ratio thresholds; maintaining greater than negative $1.0 million
net total of operating cash flow and capital expenditures quarterly; and remaining within certain monthly maximum EBITDA
loss levels. EBITDA is defined 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-based compensation expense, plus (v) (gain)/loss from
equity method investments. 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, 2017, we had $9.5 million outstanding indebtedness under our revolving line of credit. 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:
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•
•
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
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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 use operating funds to support risk-
based capital requirements and borrow additional funds to support our 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 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 or intercompany
services, could result in substantial tax liabilities.
If consumer acceptance of the Internet as an acceptable marketplace for our subscription does not continue to increase, our
growth prospects will be harmed.
Our success depends in part on widespread consumer acceptance of the Internet as a marketplace for the purchase of medical
insurance for cats and dogs. Internet use may not continue to develop at historical rates, and consumers may not continue to use
the Internet to research, select and purchase insurance. 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. Medical insurance for cats and dogs is a discretionary
purchase, and members may reduce or eliminate their discretionary spending during an economic downturn, resulting in an
increase in terminations and a reduction in the number of new member enrollments. We may experience a material increase in
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 our subscription 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.
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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 subsciption,
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.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2017, we had U.S. federal net operating loss carryforwards of approximately $86.7 million that will begin
to expire in 2027. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), 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. Pursuant to Sections 382
and 383 of the Code, annual use of our net operating loss carryforwards and credit carryforwards may be limited if we
experience an ownership change. We believe the utilization of approximately $0.5 million of net operating losses are subject to
limitation as a result of prior ownership changes based on our Section 382 study performed as of September 30, 2016. We note
subsequent ownership changes may have already and may further affect the limitation in future years.
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 subscription for 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 subscription in non-English speaking countries;
the costs and resources required to modify our subscription 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 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;
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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.
A downgrade in the financial strength rating of our insurance company may have an adverse effect on our competitive
position, the marketability of our subscription, 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 subscription, 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, cyber-attacks or 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. subscription 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 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.
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• 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.
• 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, 2017, APIC was required to maintain at least $22.2 million of risk-based capital to satisfy the No Action
Level (the highest of the above levels). As of December 31, 2017, APIC maintained $37.2 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 agents 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 veterinary invoices 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 medical insurance for cats and
dogs, our business and operating results could be harmed.
The sale of medical insurance for cats and dogs, 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;
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authorize how, by which personnel and under what circumstances insurance premiums can be quoted and published
and an insurance policy sold;
approve which entities or individuals 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.
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, and brokers, 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 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, 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, the manner in which we write policies for any unaffiliated general agent, and whether
any amounts we pay to hospitals or hospital groups is appropriate. Any modification of our marketing or business practices in
response to regulatory inquiries could harm our business, operating results or financial condition and lead to reputational harm.
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 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 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 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.
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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.
Regulations that require individuals or entities that sell medical insurance for cats and dogs or process claims to be licensed
may be interpreted to apply to our business, which could require us to modify our business practices, create liabilities,
damage our reputation, and harm our business.
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. Regulators may also require certain individuals who process claims to be licensed.
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/or may in the future determine that certain of
our personnel or referral sources were performing licensable activities without the required license. 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. We would also likely be required to modify our business practices
and/or 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 subscription 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, Internal Revenue Service 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 laws and regulations or 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, 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 and other information from and about our members
when they visit our website, call our contact center and apply for enrollment. 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 insurance advertisements
and transactions may prompt calls for more stringent consumer protection laws that may impose additional burdens on
companies conducting business and selling subscriptions 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. Failure to comply
with existing or new laws regarding electronic communications with members could lead to significant damages. 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 and email service providers and others attempt to block the
transmission of unsolicited email, commonly known as “spam.” Many 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 messaging and 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 may 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. We cannot predict or estimate the
amount of additional costs we may incur as a result of being 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) December 31, 2019, which is the end of the year in which
the fifth anniversary of our IPO would occur.
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, could affect the reporting
of transactions completed before the announcement of a change and could affect our compliance with financial debt covenants.
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
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.
33
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 report 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 operating 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 subscription, 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
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.
34
We do not intend 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
None.
Item 2. Properties
Our principal executive offices are located at 6100 4th Avenue South, Seattle, Washington. The lease for our principal office is
for 89,900 square feet and expires in July 2026. This lease includes provisions that increase our principal office space to a total
of 107,642 square feet in 2018. We also occupy 1,600 square feet of office space in Vancouver, British Columbia pursuant to a
lease that expires in March 2022.
Item 3. Legal Proceedings
Information with respect to this item may be found in Note 7 of Item 8, "Financial Statements and Supplementary Data", under
the caption, "Legal Proceedings" which information is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
36
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
PART II
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. On June 17, 2016, we voluntarily transferred the listing of our
common stock from the NYSE to the NASDAQ Global Market of the NASDAQ Stock Market LLC (NASDAQ) where our
common stock continues to be traded under the symbol “TRUP”. The following table sets forth the high and low intra-day sales
price per share for our common stock on the NASDAQ and NYSE for the period indicated:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Dividend Policy
Fiscal Year 2017
Fiscal Year 2016
High
Low
High
Low
$
$
$
$
16.99
23.16
26.93
32.68
$
$
$
$
13.91
14.39
21.00
26.08
$
$
$
$
9.85
15.92
16.93
17.18
$
$
$
$
7.82
9.54
13.52
14.75
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 7, 2018, there were 43 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 2018. 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.
37
This chart compares the stockholder return on an investment of $100 at the close of market on July 18, 2014 for (1) our common
stock, (2) the S&P Small Cap 600 Index, (3) the NASDAQ-100 Technology Sector Index, and (4) the Russell 2000 Index. All
values assume the reinvestment of any dividends; however, no dividends have been declared on our common stock to date. The
stockholder return on the following graph is not necessarily indicative of future performance.
7/18/2014
12/31/2014
12/31/2015
12/31/2016
12/31/2017
Trupanion Inc.
S&P Small Cap 600 Index
NASDAQ-100 Technology Sector
Index
Russell 2000 Index
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
60.79
104.67
108.80
104.61
$
$
$
$
85.61
101.16
106.25
98.63
$
$
$
$
136.14
126.19
131.81
117.85
$
$
$
$
256.75
140.99
180.16
133.34
38
Item 6. Selected Financial Data
The selected statements of operations, balance sheet, and other data presented below 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 report. The selected statements of operations and balance sheet data are derived from
our audited consolidated financial statements included elsewhere in this report and our previously audited financial statements
that are not included herein. Our historical results are not necessarily indicative of the results to be expected in any future
period.
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:
Technology and development(1)
General and administrative(1)
Sales and marketing(1)
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax (benefit) expense
Net loss
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands)
$
218,354
$
173,356
$
133,406
$
103,502
$
76,413
24,313
242,667
14,874
188,230
13,557
146,963
12,408
115,910
176,883
22,734
199,617
141,321
13,621
154,942
109,428
12,306
121,734
41,471
1,579
43,050
9,768
16,820
19,104
32,035
1,253
33,288
9,534
15,205
15,247
23,978
1,251
25,229
11,215
15,558
15,231
45,692
(2,642)
533
(1,244)
(1,931)
(428)
(1,503) $
39,986
(6,698)
218
(58)
(6,858)
38
(6,896) $
42,004
(16,775)
325
(9)
(17,091)
114
(17,205) $
$
85,169
10,867
96,036
18,333
1,541
19,874
9,899
14,312
11,608
35,819
(15,945)
6,726
(1,487)
(21,184)
(7)
(21,177) $
7,416
83,829
61,394
6,791
68,185
15,019
625
15,644
4,888
8,652
9,091
22,631
(6,987)
609
671
(8,267)
(92)
(8,175)
(1) Includes stock-based compensation expense as follows:
Cost of revenue
Technology and development
General and administrative
Sales and marketing
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands)
$
$
594
216
1,887
722
$
275
246
1,893
532
$
263
404
1,889
446
$
315
461
2,755
553
230
351
680
677
Total stock-based compensation expense
$
3,419
$
2,946
$
3,002
$
4,084
$
1,938
39
Consolidated balance sheet data:
Cash and cash equivalents
Short-term investments
Working capital
Total assets
Warrant liabilities
Current and long-term debt
Total liabilities
Common stock and additional paid-in capital
Convertible preferred stock
Accumulated deficit
Total stockholders' equity (deficit)
Other operational data(1):
Total subscription pets enrolled (at period end)
Total pets enrolled (at period end)
Monthly average revenue per pet
Lifetime value of a pet (LVP)
Average pet acquisition cost (PAC)(2)
Average monthly retention
December 31,
2017
2016
2015
2014
2013
(in thousands)
$
25,706
$
23,637
$
17,956
$
53,098
$
37,590
40,692
105,859
—
9,324
57,425
29,570
34,729
82,345
—
4,767
37,630
134,511
129,574
—
(82,784)
48,434
—
(81,281)
44,715
25,288
30,016
70,917
—
—
25,561
122,844
—
(74,385)
45,356
22,371
62,111
98,306
—
14,900
39,031
119,045
—
(57,180)
59,275
14,939
16,088
13,710
51,653
4,900
26,099
52,928
5,769
31,724
(36,003)
(32,999)
Year Ended December 31,
2017
2016
2015
2014
2013
371,683
423,194
52.07
727
152
$
$
$
323,233
343,649
47.82
631
123
$
$
$
272,636
291,818
45.04
591
132
$
$
$
215,491
232,450
44.14
591
121
$
$
$
168,405
182,497
42.56
619
104
$
$
$
98.63%
98.60%
98.64%
98.69%
98.65%
(1) For more information about how we calculate total subscription pets enrolled, total pets enrolled, monthly average 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 Operating Metrics.”
(2) Average pet acquisition cost is calculated in part based on net acquisition cost, a non-GAAP financial measure. For more information about net
acquisition cost and a reconciliation of sales and marketing expenses to net acquisition cost, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Non-GAAP Financial Measures.”
40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We provide medical insurance 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 insurance 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 pet acquisition cost,
based on our desired return on investment.
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 insurance, which we market to consumers. Fees are paid at
the beginning of each subscription period, which automatically renews on a monthly basis. We generate revenue in our other
business segment writing policies on behalf of third parties, where we do not undertake the marketing, and have more of a
business-to-business relationship. Our other business segment consists of companies or organizations that choose to provide
medical insurance for cats and dogs as a benefit to their employees or members, and contracts include multiple pets. The
policies in our other business segment may be materially different from our subscription business. Our ultimate goal is to build
the Trupanion brand by continuing to offer the highest value proposition in the industry and maintain strong alignment with the
veterinary community. We believe our activities in our other business segment benefit the overall market for pet medical
insurance by expanding upon product options and distribution models within other market niches.
We generate leads for our subscription business through both third-party referrals and direct-to-consumer 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 group of Territory Partners. These independent contractors are dedicated to cultivating
direct veterinary relationships and building awareness of the benefits of our subscription to 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, Trupanion. We pay Territory Partners fees based on activity in their regions. We also receive a significant number of
new leads from existing members adding pets and referring their friends and family members. Our direct-to-consumer
acquisition channels serve as important resources for pet owner education and drive new member leads and conversion. We
continuously 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 acquisition cost.
Key Operating Metrics
The following tables set forth our key operating metrics for our subscription business for the periods ended December 31, 2017,
2016 and 2015, and for each of the last eight fiscal quarters.
Total subscription pets enrolled (at period end)
Total pets enrolled (at period end)
Monthly average revenue per pet
Lifetime value of a pet (LVP)
Average pet acquisition cost (PAC)
Average monthly retention
Year Ended December 31,
2017
371,683
423,194
52.07
727
152
$
$
$
2016
323,233
343,649
47.82
631
123
$
$
$
$
$
$
2015
272,636
291,818
45.04
591
132
98.63%
98.60%
98.64%
41
Total subscription pets
enrolled (at period end)
Total pets enrolled (at period
end)
Monthly average revenue per
pet
Lifetime value of a pet
(LVP)
Average pet acquisition cost
(PAC)
Dec. 31,
2017
Sept. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Period Ended
371,683
359,102
346,409
334,909
323,233
312,282
299,856
287,123
423,194
404,069
383,293
364,259
343,649
334,070
320,896
307,298
$ 53.17
$ 52.95
$ 51.47
$ 50.50
$ 49.17
$ 48.37
$ 47.39
$ 46.12
$
$
727
184
$
$
701
151
$
$
654
143
$
$
637
128
$
$
631
133
$
$
624
120
$
$
622
118
$
$
603
123
Average monthly retention
98.63%
98.61%
98.57%
98.58%
98.60%
98.61%
98.64%
98.65%
Total subscription pets enrolled. Total subscription pets enrolled reflects the number of pets in active memberships 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.
Total pets enrolled. Total pets enrolled reflects the number of subscription pets or pets enrolled in 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.
Monthly average revenue per pet. Monthly average revenue per pet is calculated as amounts billed in a given month for
subscriptions divided by the total number of subscription pet months in the period. Total subscription pet months in a period
represents the sum of all pets enrolled for each month during the period. We monitor monthly average revenue per pet because
it is an indicator of the per pet unit economics of our business.
Lifetime value of a pet. Lifetime value of a pet (LVP) is a business operating metric that we believe reflects the lifetime value
we might expect from a new pet enrollment. We calculate LVP 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. Average pet acquisition cost (PAC) is calculated as net acquisition cost divided by the total
number of new subscription pets enrolled in that period. Net acquisition cost, a non-GAAP financial measure, is calculated in a
reporting period as sales and marketing expense, excluding stock-based compensation expense and other business segment
sales and marketing expense, offset by sign-up fee revenue. We exclude stock-based compensation expense because the amount
varies from period to period based on number of awards issued and market-based valuation inputs. We offset sign-up fee
revenue because it is a one-time charge to new members collected at the time of enrollment used to partially offset initial setup
costs, which are included in sales and marketing expenses. We exclude other business segment sales and marketing expense
because that does not relate to subscription enrollments. 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, based on our desired return on investment.
Average monthly retention. Average monthly retention is measured as the monthly retention rate of enrolled subscription 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, 2017 is an average of each month’s retention from January 1, 2017 through December 31, 2017. 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 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.
42
Non-GAAP Financial Measures
We believe that using net acquisition cost to calculate and present certain of our other key metrics is helpful to our investors
and an important tool for financial and operational decision-making and evaluating our operating results over different periods
of time. Measuring net acquisition cost by removing stock-based compensation expense and other business segment sales and
marketing expense offset by sign-up fee revenue provides for a more comparable metric across periods.
This measure, which is a non-GAAP financial measure, may not provide information that is directly comparable to that
provided by other companies in our industry. In addition, this measure excludes stock-based compensation expense, which has
been, and is expected to continue to be for the foreseeable future, a significant recurring component of our sales and marketing
expense. 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.
The following tables reflect the reconciliation of net acquisition cost to sales and marketing expense (in thousands):
Sales and marketing expense
Net of sign-up fee revenue
Excluding:
Stock-based compensation expense
Other business segment sales and marketing expense
Net acquisition cost
Year Ended December 31,
2017
2016
2015
$
$
$
19,104
(2,169)
$
15,247
(2,073)
(722)
(218)
15,995
$
(532)
(218)
12,424
$
15,231
(1,983)
(446)
(80)
12,722
Sales and marketing
expense
Net of sign-up fee
revenue
Excluding:
Stock-based
compensation expense
Other business
segment sales and
marketing expense
Dec. 31,
2017
Sept. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Three Months Ended
$
5,781
$
4,862
$
4,372
$
4,089
$
3,951
$
3,892
$
3,564
$
3,840
(550)
(558)
(517)
(544)
(526)
(525)
(495)
(527)
(172)
(165)
(198)
(187)
(113)
(172)
(165)
(82)
(56)
(51)
(63)
(48)
3,310
$
(62)
3,250
$
(63)
3,132
$
(55)
2,849
$
(38)
3,193
Net acquisition cost
$
5,003
$
4,088
$
3,594
$
Components of Operating Results
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 pet medical insurance, which we market to consumers. When we do
not directly market and sell to consumers, we classify the related revenue and expenses in our other business segment.
Revenue
We generate revenue in our subscription business segment primarily from subscription fees for our pet medical insurance. Fees
are paid at the beginning of each subscription period, which automatically renews on a monthly basis. In most cases, our
members authorize 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 on behalf of third parties where we do not
undertake the direct consumer marketing. This segment includes the writing of policies that may be materially different from
our subscription.
43
Cost of Revenue
Cost of revenue in each of our segments is comprised of the following:
Veterinary invoice expense
Veterinary invoice expense includes our costs to review veterinary invoices, administer the payments, and provide
member services, and other operating expenses directly or indirectly related to this process. We also accrue for
veterinary invoices that have been incurred but not yet received. This also includes amounts paid by unaffiliated
general agents, and an estimate of amounts incurred and not yet paid for our other business segment.
Other cost of revenue
Other cost of revenue for the subscription business segment includes direct and indirect member service expenses,
Territory Partner renewal fees, credit card transaction fees and premium tax expenses. Other cost of revenue for the
other business segment includes the commissions we pay to unaffiliated general agents, costs to administer the
programs in the other business segment and premium taxes on the sales in this segment.
Operating Expenses
Our operating expenses are classified into three categories: technology and development, general and administrative, and sales
and marketing. For each category, the largest component is personnel costs, which include salaries, employee benefit costs,
bonuses and stock-based compensation expense.
Technology and Development
Technology and development expenses primarily consist of personnel costs and related expenses for our technology
staff, which includes information technology development and infrastructure support, third-party services and
depreciation of hardware and capitalized software.
General and Administrative
General and administrative expenses consist primarily of personnel costs and related expenses for our finance,
actuarial, human resources, regulatory, legal and general management functions, as well as facilities and professional
services.
Sales and Marketing
Sales and marketing expenses primarily consist of the cost to educate veterinarians and consumers about the benefits
of Trupanion, to generate leads and to convert leads into enrolled pets, as well as print, online and promotional
advertising costs, and employee compensation and related costs. Sales and marketing expenses are driven primarily by
investments to acquire new members.
44
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 retain enrolled pets
depends on a number of factors, including the actual and perceived value of our services and the quality of our member
experience, the ease and transparency of the process for reviewing and paying veterinary invoices for our members, 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, the frequency of
existing members adding a pet or referring their friends or family, 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 and estimated rates of return on pet acquisition
spend. We also regularly test new member acquisition channels and marketing initiatives, which may be more expensive than
our traditional marketing channels and may increase our average acquisition costs. We continually assess our sales and
marketing activities by monitoring the ratio of LVP to PAC and the return on PAC spend both on a detailed level by acquisition
channel and in the aggregate.
Timing of initiatives. Over time we plan to implement new initiatives to improve our member experience, make modifications
to our subscription 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 average
revenue per pet we receive. Prices for our plan in Canada are generally higher than in the United States (in local currencies),
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 average 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.
Other business segment. Our other business segment primarily includes revenue and expenses related to policies written on
behalf of third parties. This segment includes the writing of policies that may be materially different from our subscription. Our
relationships in our other business segment are generally subject to termination provisions and are non-exclusive. Accordingly,
we cannot control the volume of business, even if a contract is not terminated. Loss of an entire program via contract
termination could result in the associated policies and revenues being lost over a period of 12 to 18 months, which could have a
material impact on our results of operations. We may enter into additional relationships in the future to the extent we believe
they will be profitable to us, which could also impact our operating results.
45
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
total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future
results.
Year Ended December 31,
2017
2016
2015
(in thousands)
$
218,354
$
173,356
$
133,406
24,313
242,667
176,883
22,734
199,617
41,471
1,579
43,050
9,768
16,820
19,104
14,874
188,230
141,321
13,621
154,942
32,035
1,253
33,288
9,534
15,205
15,247
45,692
(2,642)
533
(1,244)
(1,931)
(428)
(1,503) $
39,986
(6,698)
218
(58)
(6,858)
38
(6,896) $
13,557
146,963
109,428
12,306
121,734
23,978
1,251
25,229
11,215
15,558
15,231
42,004
(16,775)
325
(9)
(17,091)
114
(17,205)
Year Ended December 31,
2017
2016
2015
(in thousands)
$
594
216
1,887
722
$
275
246
1,893
532
3,419
$
2,946
$
263
404
1,889
446
3,002
$
$
$
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:
Technology and development(1)
General and administrative(1)
Sales and marketing(1)
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax (benefit) expense
Net loss
(1) Includes stock-based compensation expense as follows:
Cost of revenue
Technology and development
General and administrative
Sales and marketing
Total stock-based compensation expense
46
Revenue
Cost of revenue
Gross profit
Operating expenses:
Technology and development
General and administrative
Sales and marketing
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax (benefit) expense
Net loss
Subscription business revenue
Subscription business cost of revenue
Subscription business gross profit
Comparison of the years ended December 31, 2017, 2016 and 2015
Revenue
Year Ended December 31,
2017
2016
2015
(as a percentage of revenue)
100 %
100 %
100 %
82
18
4
7
8
19
(1)
—
(1)
(1)
—
82
18
5
8
8
21
(4)
—
—
(4)
—
83
17
8
11
10
29
(12)
—
—
(12)
—
(1)%
(4)%
(12)%
Year Ended December 31,
2017
2016
2015
(as a percentage of subscription revenue)
100%
81
19%
100%
82
18%
100%
82
18%
Revenue:
Subscription business
Other business
Total revenue
Percentage of Revenue by Segment:
Subscription business
Other business
Total revenue
Year Ended December 31,
Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
(in thousands, except percentages, pet and per pet data)
$
$
218,354
24,313
242,667
$
$
173,356
14,874
188,230
$
$
133,406
13,557
146,963
26%
63
29
30%
10
28
90%
10
100%
92%
8
100%
91%
9
100%
272,636
291,818
45.04
98.64%
15
23
9
19
18
6
Total subscription pets enrolled (at period end)
Total pets enrolled (at period end)
371,683
423,194
323,233
343,649
Monthly average revenue per pet
Average monthly retention
$
52.07
$
47.82
$
98.63%
98.60%
47
Year ended December 31, 2017 compared to year ended December 31, 2016. Total revenue increased by $54.4 million to
$242.7 million for the year ended December 31, 2017, or 29%. Revenue from our subscription business segment increased by
$45.0 million to $218.4 million for the year ended December 31, 2017, or 26%. This increase in subscription business revenue
was primarily due to a 15% increase in total subscription pets enrolled as of December 31, 2017 compared to December 31,
2016, and increased average revenue per pet of 9% for the same period. Increases in pricing were due to the increased cost of
veterinary care and more accurately pricing to our cost-plus margin structure by subcategory. Revenue from our other business
segment increased $9.4 million to $24.3 million for the year ended December 31, 2017, or 63%, due to an increase in enrolled
pets in this segment.
Year ended December 31, 2016 compared to year ended December 31, 2015. Total revenue increased by $41.3 million to
$188.2 million for the year ended December 31, 2016, or 28%. Revenue for our subscription business segment increased by
$40.0 million to $173.4 million for the year ended December 31, 2016, or 30%. This increase in subscription business revenue
was primarily due to a 19% increase in total subscription pets enrolled as of December 31, 2016 compared to December 31,
2015, and increased average revenue per pet of 6% for the same period. Increases in pricing were due to the increased cost of
veterinary care. Revenue from our other business segment increased $1.3 million to $14.9 million for the year ended
December 31, 2016, or 10%, due to an increase in enrolled pets in this segment.
Cost of Revenue
Cost of Revenue:
Subscription business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Gross profit
Other business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Gross profit
Percentage of Revenue by Segment:
Subscription business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Gross profit
Other business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Gross profit
Year Ended December 31,
Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
(in thousands, except percentages, pet and per pet data)
$
155,554
$
124,636
$
21,329
176,883
41,471
14,568
8,166
22,734
1,579
16,685
141,321
32,035
8,898
4,723
13,621
1,253
95,420
14,008
109,428
23,978
7,904
4,402
12,306
1,251
25%
31%
28
25
29
64
73
67
26
19
29
34
13
7
11
—
71%
72%
72%
10
81
19
60
34
94
6
10
82
18
60
32
92
8
10
82
18
58
32
91
9
Total subscription pets enrolled (at period end)
Total pets enrolled (at period end)
371,683
423,194
323,233
343,649
272,636
291,818
Monthly average revenue per pet
$
52.07
$
47.82
$
45.04
15
23
9
19
18
6
48
Year ended December 31, 2017 compared to year ended December 31, 2016. Cost of revenue for our subscription business
segment was $176.9 million, or 81% of revenue, for the year ended December 31, 2017, compared to $141.3 million, or 82%,
of revenue for the year ended December 31, 2016. This $35.6 million increase in subscription cost of revenue was primarily the
result of a 15% increase in subscription pets enrolled, resulting in a 25% increase in veterinary invoice expense and related
internal processing costs. As a percentage of revenue, these costs decreased to 71% for the year ended December 31, 2017 from
72% for the year ended December 31, 2016, due to the increase in monthly average revenue per pet outpacing the cost of
veterinary care for certain subcategories as we more accurately priced those subcategories. Cost of revenue for our other
business segment increased $9.1 million to $22.7 million for the year ended December 31, 2017, due to an increase in enrolled
pets in this segment.
Year ended December 31, 2016 compared to year ended December 31, 2015. Cost of revenue for our subscription business
segment was $141.3 million, or 82% of revenue, for the year ended December 31, 2016, compared to $109.4 million, or 82% of
revenue, for the year ended December 31, 2015. This $31.9 million increase in subscription cost of revenue was primarily the
result of a 19% increase in subscription pets enrolled, resulting in a 31% increase in veterinary invoice expense and related
internal processing costs. As a percentage of revenue, these costs were 72% for the years ended December 31, 2016 and 2015.
Average revenue per pet increased for the year ended December 31, 2016, however the impact of this on gross margin was
offset by an increase in compensation expense by $2.1 million, or 17%, related to increases in headcount to service growth and
improve member experience. Cost of revenue for our other business segment increased $1.3 million to $13.6 million for the
year ended December 31, 2016, due to an increase in enrolled pets in this segment.
Technology and Development Expenses
Year Ended December 31,
Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
(in thousands, except percentages)
Technology and development
$
9,768
$
9,534
$
11,215
2%
(15)%
Percentage of total revenue
4%
5%
8%
Year ended December 31, 2017 compared to year ended December 31, 2016. Technology and development expenses increased
$0.2 million, or 2%, to $9.8 million for the year ended December 31, 2017. This increase was primarily due to a $0.5 million
increase in amortization expense related to projects placed into service in late 2016. This was offset by a $0.3 million decrease
in infrastructure related costs compared to the same period in the prior year.
Year ended December 31, 2016 compared to year ended December 31, 2015. Technology and development expenses
decreased $1.7 million, or 15%, to $9.5 million for the year ended December 31, 2016. This decrease was partially due to a
$2.7 million decrease in professional services and compensation expense and related costs as headcount decreased 36% in this
department. This was partially offset by a $1.2 million increase in depreciation expense, driven by several projects being placed
into service during 2016.
General and Administrative Expenses
Year Ended December 31,
Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
(in thousands, except percentages)
General and administrative
Percentage of total revenue
$
16,820
$
15,205
$
15,558
11%
(2)%
7%
8%
11%
Year ended December 31, 2017 compared to year ended December 31, 2016. General and administrative expenses increased
$1.6 million, or 11%, to $16.8 million for the year ended December 31, 2017. This was primarily due to an increase of $1.0
million related to higher rent and occupancy costs after our move to a new building in the third quarter of 2016. General and
administrative expenses decreased from 8% to 7% as a percentage of revenue for the year ended December 31, 2017, as we
experienced scale in our support functions.
49
Year ended December 31, 2016 compared to year ended December 31, 2015. General and administrative expenses decreased
$0.4 million, or 2%, to $15.2 million for the year ended December 31, 2016. This was primarily due to a decrease in personnel
costs and related expenses of $0.6 million resulting from lower incentive compensation while headcount remained consistent.
General and administrative expenses decreased from 11% to 8% as a percentage of revenue for the year ended December 31,
2016, as we experienced scale in our support functions.
Sales and Marketing Expenses
Sales and marketing
Subscription Business:
Total subscription pets enrolled (at period
end)
Average pet acquisition cost (PAC)
$
$
Year Ended December 31,
Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
(in thousands, except pet and per pet data)
19,104
$
15,247
$
15,231
25%
—%
371,683
152
$
323,233
123
$
272,636
132
15
24
19
(7)
Year ended December 31, 2017 compared to year ended December 31, 2016. Sales and marketing expense increased $3.9
million, or 25%, to $19.1 million for the year ended December 31, 2017. PAC increased 24% from December 31, 2016, to $152
for the year ended December 31, 2017, as a result of $1.8 million in additional testing of new marketing initiatives.
Additionally, compensation and related expenses increased by $2.0 million due to a 21% increase in headcount in the year
ended December 31, 2017.
Year ended December 31, 2016 compared to year ended December 31, 2015. Sales and marketing expenses remained
consistent at $15.2 million for the years ended December 31, 2016 and 2015. PAC decreased 7% from December 31, 2015 to
$123 for the year ended December 31, 2016. Headcount within the sales and marketing department increased by 30% in the
year ended December 31, 2016. This cost was offset by a decrease in the use of third-party vendors. Our core sales and
marketing initiatives remained consistent each year.
Total Other (Income) Expense, Net
Interest expense
Other (income) expense, net
Total other (income) expense, net
Year Ended December 31,
2017
2016
2015
(in thousands)
$
$
$
533
(1,244)
(711) $
218
(58)
160
$
$
325
(9)
316
Year ended December 31, 2017 compared to year ended December 31, 2016. Total other (income) expense, net improved by
$0.9 million primarily due to a $1.0 million gain related to the sale of our equity method investment in the second quarter of
2017.
Year ended December 31, 2016 compared to year ended December 31, 2015. Total other (income) expense, net decreased $0.2
million primarily due to a $0.1 million decrease in interest expense resulting from a lower outstanding average loan balance.
50
Income Tax (Benefit) Expense
Income tax (benefit) expense
Effective tax rate
Year Ended December 31,
2017
2016
2015
(in thousands, except percentages)
$
$
(428)
22.2%
38
$
(0.6)%
114
(0.7)%
Year ended December 31, 2017 compared to year ended December 31, 2016. On December 22, 2017, the U.S. government
enacted the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the Code, including, but
not limited to, reducing the corporate tax rate to 21% effective January 1, 2018. As a result, we have recorded a decrease of
$0.6 million to our net deferred tax liability recorded on our consolidated balance sheet, with a corresponding adjustment to
income tax benefit for the year ended December 31, 2017. This tax benefit represents our best estimate of the impact of the Tax
Act in accordance with our understanding of the Tax Act and available guidance as of our date of filing. As we complete our
analysis, we may identify newly relevant information or adjust our interpretation of the requirements as additional guidance on
the Tax Act becomes available. If an adjustment is required, it may materially change our income tax benefit or expense in the
period in which the adjustment is made.
The Tax Act makes additional significant changes to the Code, such as, (1) imposing a mandatory one-time tax on accumulated
earnings of foreign subsidiaries and transitioning U.S. international taxation from a worldwide tax system to a territorial system
with base erosion rules; (2) imposing changes on the utilization of net operating losses; (3) other general changes to the
taxation of corporations, including changes to cost recovery rules, changes to the deductibility of interest expense, and
elimination of the performance-based compensation exception for executive compensation; therefore, the overall impact of the
Tax Act on our future results of operations is uncertain at this time. We intend to continue to reinvest all of our foreign earnings
indefinitely outside of the U.S.
Year ended December 31, 2016 compared to year ended December 31, 2015. The effective tax rate remained consistent for the
years ended December 31, 2016 and 2015 due to our full valuation allowance on our reported deferred tax assets.
51
Quarterly Results of Operations
The following tables contain selected quarterly financial information for the years ended December 31, 2017 and 2016. The
unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements and
includes all adjustments that we consider necessary for a fair presentation of the information shown. These quarterly operating
results for any fiscal quarter are not necessarily indicative of the operating results for any full fiscal year or future period.
Consolidated Statements of
Operations Data:
Three Months Ended
Dec. 31,
2017
Sept. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
(in thousands)
Revenue:
Subscription business
$
58,991
$
56,493
$
52,641
$
50,229
$
47,422
$
44,629
$
42,162
$
39,143
Other business
Total revenue
Cost of revenue:
Subscription business(1)
Other business
Total cost of revenue
Gross profit:
7,554
66,545
47,831
6,977
54,808
6,625
63,118
45,215
6,096
51,311
5,634
58,275
42,591
5,333
47,924
Subscription business
11,160
11,278
10,050
Other business
577
529
301
Total gross profit
11,737
11,807
10,351
Operating expenses:
Technology and
development(1)
General and administrative(1)
Sales and marketing(1)
Total operating expenses
Operating (loss) income
Interest expense
Other (income) expense, net
(Loss) income before income
taxes
Income tax (benefit) expense
2,572
4,546
5,781
12,899
(1,162)
163
(5)
(1,320)
(482)
2,471
4,017
4,862
2,322
4,245
4,372
11,350
10,939
457
124
(99)
432
26
(588)
109
(1,112)
415
4
4,500
54,729
41,246
4,328
45,574
8,983
172
9,155
2,403
4,012
4,089
10,504
(1,349)
137
(28)
3,918
51,340
38,528
3,594
42,122
8,894
324
9,218
2,744
4,177
3,951
10,872
(1,654)
81
(19)
3,730
48,359
36,432
3,427
39,859
8,197
303
8,500
2,339
3,811
3,892
10,042
(1,542)
66
16
3,670
45,832
34,158
3,408
37,566
8,004
262
8,266
2,164
3,495
3,564
9,223
3,556
42,699
32,203
3,192
35,395
6,940
364
7,304
2,287
3,722
3,840
9,849
(957)
(2,545)
41
(38)
30
(17)
(1,458)
(1,716)
(1,624)
(960)
(2,558)
24
7
13
4
14
Net (loss) income
$
(838) $
406
$
411
$
(1,482) $
(1,723) $
(1,637) $
(964) $
(2,572)
(1) Includes stock-based compensation expense as follows (in thousands):
Dec. 31,
2017
Sept. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Three Months Ended
Cost of revenue
$
162
$
170
$
149
$
113
$
(in thousands)
Technology and development
General and administrative
Sales and marketing
Total stock-based
compensation expense
50
471
172
57
503
165
59
482
198
50
431
187
$
60
88
470
113
$
83
67
454
172
$
66
36
476
165
66
55
493
82
$
855
$
895
$
888
$
781
$
731
$
776
$
743
$
696
52
Dec. 31,
2017
Sept. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Period Ended
Other Financial and
Operational Data(2):
Total subscription pets enrolled
(at period end)
Total pets enrolled (at period
end)
Monthly average revenue per
pet
Lifetime value of a pet (LVP)
Average pet acquisition cost
(PAC)(3)
371,683
359,102
346,409
334,909
323,233
312,282
299,856
287,123
423,194
404,069
383,293
364,259
343,649
334,070
320,896
307,298
$
$
$
53.17
727
184
$
$
$
52.95
701
151
$
$
$
51.47
654
143
$
$
$
50.50
637
128
$
$
$
49.17
631
133
$
$
$
48.37
624
120
$
$
$
47.39
622
118
$
$
$
46.12
603
123
Average monthly retention
98.63%
98.61%
98.57%
98.58%
98.60%
98.61%
98.64%
98.65%
Revenue
Cost of revenue
Gross profit
Operating expenses:
Technology and
development
General and administrative
Sales and marketing
Total operating expenses
Operating (loss) income
Interest expense
Other (income) expense, net
(Loss) income before income
taxes
Income tax benefit
Net (loss) income
Three Months Ended
Dec. 31,
2017
Sept. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
(as a percentage of revenue)
100 %
100%
100%
100 %
100 %
100 %
100 %
100 %
82
18
4
7
9
19
(2)
—
—
(2)
(1)
81
19
4
6
8
18
1
—
—
1
—
82
18
4
7
8
19
(1)
—
(2)
1
—
83
17
4
7
8
19
(3)
—
—
(3)
—
82
18
5
8
8
21
(3)
—
—
(3)
—
82
18
5
8
8
21
(3)
—
—
(3)
—
82
18
5
8
8
20
(2)
—
—
(2)
—
83
17
5
9
9
23
(6)
—
—
(6)
—
(1)%
1%
1%
(3)%
(3)%
(3)%
(2)%
(6)%
Dec. 31,
2017
Sept. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
(as a percentage of subscription revenue)
Three Months Ended
Subscription business revenue
100%
100%
100%
100%
100%
100%
100%
100%
Subscription business cost of
revenue
Subscription business gross
profit
81
80
81
82
81
82
81
82
19%
20%
19%
18%
19%
18%
19%
18%
53
Liquidity and Capital Resources
The following table summarizes our cash flows for the periods indicated (in thousands):
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rates on cash and cash equivalents
Net change in cash, cash equivalents, and restricted cash
Year Ended December 31,
2017
2016
2015
$
$
$
9,666
(13,056)
5,081
378
$
5,006
(6,508)
7,672
111
2,069
$
6,281
$
(10,425)
(9,923)
(14,208)
(586)
(35,142)
Our primary sources of liquidity are cash provided by operations and available borrowings on our line of credit. Our primary
requirements for liquidity are paying veterinary invoices, funding operations and capital requirements, investing in new
member acquisition, investing in enhancements to our member experience, and servicing debt.
As of December 31, 2017, we had $63.3 million of cash, cash equivalents, and short-term investments and $18.7 million
available under our line of credit, which excludes $1.8 million reserved under the credit agreement for an outstanding letter of
credit and other ancillary services. Most of the assets in APIC and WICL 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,
2017, total assets and liabilities held outside of our insurance entities totaled $42.7 million and $20.4 million, respectively,
including $19.2 million of cash and cash equivalents that are segregated from other operating funds and held in trust for the
payment of veterinary invoices on behalf of our subsidiaries.
We believe our cash and cash equivalents, short-term investments and line of credit are sufficient to fund our operations and
capital requirements for the next 12 months. As we continue to grow, however, we may explore additional financing to fund our
operations or to meet capital requirements. Financing could include equity, equity-linked, or debt financing. Additional
financing may not be available to us on acceptable terms, or at all.
Operating Cash Flows
We derive operating cash flows from the sale of our subscription plans, which is used to pay veterinary invoices and other cost
of revenue. Additionally, cash is used to support the growth of our business by reinvesting to acquire new pet enrollments and
to fund projects that improve our members' experience. Cash provided by operating activities was $9.7 million for the year
ended December 31, 2017 compared to cash provided by operating activities of $5.0 million for the year ended December 31,
2016. The increase in cash provided by operating activities of $4.7 million was primarily due to the $4.1 million decrease in
operating loss, driven by higher revenue and decreased operating expenses as a percentage of revenue as we increased scale in
our technology and general and administrative departments.
Cash provided by operating activities was $5.0 million for the year ended December 31, 2016 compared to cash used in
operating activities of $10.4 million for the year ended December 31, 2015. The increase in cash provided by operating
activities of $15.4 million was primarily due to the $10.1 million decrease in operating loss, driven by higher revenue and
decreased operating expenses as a percentage of revenue as we increased scale in our technology and general and
administrative departments. Additionally, we reduced spend as a percentage of revenue in our sales and marketing department.
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. As of December 31, 2017, we had $40.8 million in short-term and long-term investments in
our insurance entities, APIC and WICL Segregated Account AX. These investments are held to satisfy statutory requirements.
Our regulators 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.
Financing Cash Flows
Cash provided by financing activities was $5.1 million and $7.7 million for the years ended December 31, 2017 and 2016,
respectively. The decrease of $2.6 million was primarily due to a decrease of $1.2 million in proceeds from exercises of stock
options. We also paid an additional $0.5 million for tax withholding on restricted stock.
Cash used in financing activities for the year ended December 31, 2015 was $14.2 million. For the year ended December 31,
2016, cash provided by financing activities increased by $21.9 million primarily due to borrowings under our line of credit of
$5.0 million, as compared to payments on our line of credit of $14.9 million, for the years ended December 31, 2016 and 2015,
respectively.
54
Long-Term Debt
Pacific Western Bank Loan and Security Agreement
In December 2016, we entered into a syndicated loan agreement with Pacific Western Bank (PWB) and Western Alliance Bank
(WAB) that increased our previous facility from $20.0 million to $30.0 million. The agreement was amended during the current
year to extend the maturity date to December 2019. We refer to the restated and amended loan and security agreement as our
PWB credit facility. The maximum amount available to us under the PWB credit facility, inclusive of any amounts outstanding
under the revolving line of credit, is the lesser of $30.0 million or the total amount of cash and securities held by our insurance
subsidiaries (APIC and WICL), less $1.8 million for obligations we have outstanding from PWB and/or WAB for other
ancillary services and our letter of credit. Interest on the PWB credit facility accrues at a variable annual rate equal to the
greater of 4.5% or 1.25% plus the prime rate (5.75% at December 31, 2017).
The PWB credit facility requires us to maintain certain financial and non-financial covenants, including maintaining a
minimum cash balance of $0.6 million in our account at WAB and/or WAB affiliates and other cash or investments of $1.4
million in our accounts at PWB. As of December 31, 2017, we were in compliance with each of the financial and non-financial
covenants.
Our obligations under the PWB credit facility are secured by substantially all of our assets and a pledge of certain of our
subsidiaries’ stock. As of December 31, 2017, we had $9.5 million in aggregate borrowings outstanding under the PWB credit
facility.
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. For enforceable and legally binding contracts, our contractual cash obligations as of
December 31, 2017 are set forth below (in thousands):
Long-term debt obligations(1)
Operating lease obligations(2)
Capital leases(3)
Other obligations(4)
Total
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
$
9,500
$
— $
9,500
$
— $
19,201
519
1,625
1,876
519
927
4,151
—
681
4,455
—
17
—
8,719
—
—
$
30,845
$
3,322
$
14,332
$
4,472
$
8,719
(1) Consists of our revolving line of credit. Excludes interest of the greater of 4.5% or 1.25% plus the prime rate (5.75% at December 31, 2017).
(2) Consists of contractual obligations from non-cancellable office space under operating lease.
(3) Consists of contractual obligations from property and equipment purchased under capital lease.
(4) Consists of contractual obligations from non-cancellable vendor service agreements.
55
Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported revenue and
expenses during the reporting periods.
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. Generally, we base our estimates on
historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates.
Reserve for Veterinary Invoices
The reserve for our subscription business represents our estimate of the future amount we will pay for veterinary invoices that
are dated as of, or prior to, our balance sheet date. The reserve also includes our estimate of related internal processing costs. To
determine the accrual, we make assumptions based on our historical experience, including the number of veterinary invoices
we expect to receive, the average cost of those veterinary invoices, the length of time between the date of the veterinary invoice
and the date we receive it, the member's chosen deductible, and our expected cost to process and administer the payments. As
of each balance sheet date, we reevaluate our reserve and may adjust the estimate for new information.
For the year ended December 31, 2017, we paid $7.8 million for veterinary invoices dated on or before December 31, 2016,
including related processing costs. Our reserve estimate for these expenses was $8.5 million as of December 31, 2016. As of
December 31, 2017, we reevaluated the remaining reserve for those periods prior to December 31, 2016 and recorded an
adjustment to our income statement to reduce it by $0.1 million. As of December 31, 2017, our reserve was $11.1 million,
consisting of $10.4 million for the amount we expect to pay in the future for veterinary invoices dated between January 1, 2017
and December 31, 2017, inclusive of related processing costs, as well as the adjusted reserve of $0.7 million for periods prior to
2017.
Similarly, for the years ended December 31, 2016 and 2015, we adjusted our reserve for prior periods, increasing it by $0.8
million and less than $0.1 million, respectively. These adjustments were recorded in our income statement for each respective
year.
Income Taxes
We determine our deferred tax assets and liabilities based on the differences between the financial reporting and tax basis of
assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect when
the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that the deferred tax
asset will not be recovered. We apply judgment in the determination of the consolidated financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Although we believe our assumptions, judgments
and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could
significantly impact the amounts provided for income taxes in our consolidated financial statements.
On December 22, 2017, the U.S. government enacted the Tax Act, making broad and complex changes to the Code. As a result,
we have made significant judgments and estimates in accordance with our understanding of the Tax Act and available guidance
as of our date of filing. We may identify newly relevant information or adjust our interpretation of the requirements as
additional guidance on the Tax Act becomes available. If an adjustment is required, it may materially change our income tax
benefit or expense in the period in which the adjustment is made.
56
Stock-Based Compensation
Compensation expense related to stock-based transactions, including employee and non-employee stock option awards,
restricted stock awards, and restricted stock units, is measured and recognized in the financial statements based on fair value.
The fair value of stock options is estimated on the measurement date using the Black-Scholes option-pricing model that
requires management to apply judgment and make estimates, including:
• Expected volatility —We estimate the expected volatility based on the historical volatility of a representative group of
publicly traded companies with similar characteristics to us, and our own historical volatility;
• Expected term for awards granted to employees —We have based our expected term for awards issued to employees
on the simplified method, as permitted by the SEC Staff Accounting Bulletin No. 110, Share-Based Payment, as we
have insufficient historical information regarding our stock options to provide a basis for an estimate;
• 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; and
• 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 use an expected dividend yield of zero.
Stock-based compensation expense for stock options, restricted stock awards, and restricted stock units is recognized on a
straight-line basis over the requisite service period, which is generally the vesting period of the respective award. We recognize
forfeitures when they occur.
57
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to market risks in the ordinary course of business, primarily related to interest rate sensitivities and foreign
currency exchange risk.
Interest Rate Risk
We are exposed to interest rate risk as a result of our debt and our investment activities. Our revolving line of credit with
Pacific Western Bank (PWB) and Western Alliance Bank (WAB) bears interest at the rate of the greater of 4.5% or 1.25% plus
the prime rate. As of December 31, 2017, our aggregate outstanding indebtedness was $9.5 million. The primary objective of
our investment activities is to maintain principal and the majority of our investments are short-term in nature. A 10% change in
market interest rates would not be expected to have a material impact on our consolidated financial condition or results of
operations.
Foreign Currency Exchange Risk
We generate approximately 20% of our revenue in 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. A 10% change in the Canadian currency exchange rate could have a material
impact on our consolidated financial condition or results of operations. A hypothetical change of this magnitude would have
increased or decreased our total revenues by approximately $4.7 million, total expenses by approximately $3.4 million, and
have a net impact of $1.3 million of income or loss for the year ended December 31, 2017. To date, we have not entered into
any material foreign currency hedging contracts although we may do so in the future.
58
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 Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
60
61
62
63
64
65
66
59
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Trupanion, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Trupanion, Inc. (the Company) as of December 31, 2017
and 2016, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in
the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and
2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in
conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Seattle, Washington
February 13, 2018
60
Trupanion, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Revenue
Cost of revenue:
Veterinary invoice expense
Other cost of revenue
Gross profit
Operating expenses:
Technology and development
General and administrative
Sales and marketing
Total operating expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax (benefit) expense
Net loss
Net loss per share:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Year Ended December 31,
2017
2016
2015
$
242,667
$
188,230
$
146,963
170,122
29,495
43,050
133,534
21,408
33,288
9,768
16,820
19,104
45,692
(2,642)
533
(1,244)
(1,931)
(428)
(1,503) $
9,534
15,205
15,247
39,986
(6,698)
218
(58)
(6,858)
38
(6,896) $
103,324
18,410
25,229
11,215
15,558
15,231
42,004
(16,775)
325
(9)
(17,091)
114
(17,205)
(0.05) $
(0.24) $
(0.62)
29,588,324
28,527,602
27,638,443
$
$
61
Trupanion, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustments
Net unrealized gain on available-for-sale debt securities
Other comprehensive income (loss), net of taxes
Comprehensive loss
Year Ended December 31,
2017
2016
2015
$
(1,503) $
(6,896) $
(17,205)
277
8
79
46
285
(1,218) $
125
(6,771) $
$
(517)
4
(513)
(17,718)
62
Trupanion, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts and other receivables
Prepaid expenses and other assets
Total current assets
Restricted cash
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 and other current liabilities
Reserve for veterinary invoices
Deferred revenue
Total current liabilities
Long-term debt
Deferred tax liabilities
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock: $0.00001 par value per share, 100,000,000 shares authorized at December 31,
2017 and December 31, 2016, 30,778,796 and 30,121,496 shares issued and outstanding at
December 31, 2017; 30,156,247 and 29,498,947 shares issued and outstanding at December 31,
2016
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31,
2017 and December 31, 2016, and 0 shares issued and outstanding at December 31, 2017 and
December 31, 2016
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock, at cost: 657,300 shares at December 31, 2017 and December 31, 2016
Total stockholders’ equity
Total liabilities and stockholders’ equity
63
December 31,
2017
2016
$
25,706
$
37,590
20,367
2,895
86,558
600
3,237
—
7,868
4,972
2,624
23,637
29,570
10,118
2,062
65,387
600
2,579
271
8,464
4,910
134
105,859
$
82,345
$
$
2,716
$
7,660
12,756
22,734
45,866
9,324
1,002
1,233
57,425
—
—
134,511
(92)
(82,784)
(3,201)
48,434
2,006
5,416
9,521
13,463
30,406
4,767
1,623
834
37,630
—
—
129,574
(377)
(81,281)
(3,201)
44,715
82,345
$
105,859
$
Balance at December 31, 2014
Issuance of common stock in connection with the Company's
equity award programs, net of tax withholdings
Stock compensation expense
Other comprehensive loss
Net loss
Balance at December 31, 2015
Exercise of warrants
Issuance of common stock in connection with the Company's
equity award programs, net of tax withholdings
Stock compensation expense
Purchase of treasury stock
Other comprehensive income
Net loss
Balance at December 31, 2016
Issuance of common stock in connection with the Company's
equity award programs, net of tax withholdings
Stock compensation expense
Other comprehensive income
Net loss
Balance at December 31, 2017
Trupanion, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Common Stock
Shares
Amount
27,830,941
565,248
—
—
—
28,396,189
59,999
1,079,080
—
(36,321)
—
—
29,498,947
622,549
—
—
—
Additional
Paid-in Capital
Accumulated
Deficit
119,045
(57,180)
692
3,107
—
—
122,844
600
3,083
3,047
—
—
—
129,574
1,375
3,562
—
—
—
—
—
(17,205)
(74,385)
—
—
—
—
—
(6,896)
(81,281)
—
—
—
(1,503)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Accumulated
Other
Comprehensive
Loss
11
—
—
(513)
—
(502)
—
—
—
—
125
—
(377)
—
—
285
—
Treasury Stock
Total
Stockholders'
Equity
(2,601)
59,275
—
—
—
—
(2,601)
—
—
—
(600)
—
—
(3,201)
—
—
—
—
692
3,107
(513)
(17,205)
45,356
600
3,083
3,047
(600)
125
(6,896)
44,715
1,375
3,562
285
(1,503)
48,434
30,121,496 $
— $
134,511 $
(82,784) $
(92) $
(3,201) $
64
Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2017
2016
2015
$
(1,503) $
(6,896) $
(17,205)
Operating activities
Net loss
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation and amortization
Stock-based compensation expense
Gain on sale of equity method investment
Other, net
Changes in operating assets and liabilities:
Accounts and other receivables
Prepaid expenses and other assets
Accounts payable, accrued liabilities, and other liabilities
Reserve for veterinary invoices
Deferred revenue
Net cash provided by (used in) operating activities
Investing activities
Purchases of investment securities
Maturities of investment securities
Proceeds from sale of equity method investment
Purchases of property and equipment
Other investments
Net cash used in investing activities
Financing activities
Proceeds from exercise of stock options
Taxes paid related to net share settlement of equity awards
Proceeds from debt financing, net of financing fees
Other financing
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash, cash equivalents, and
restricted cash, net
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Supplemental disclosures
Income taxes paid
Interest paid
Noncash investing and financing activities:
Purchases of property and equipment included in accounts payable
and accrued liabilities
Property and equipment acquired under capital lease
Cashless exercise of common stock warrants
$
65
4,232
3,419
(1,036)
(383)
(10,219)
(179)
3,019
3,149
9,167
9,666
(31,920)
23,372
1,402
(3,131)
(2,779)
(13,056)
2,545
(1,170)
4,400
(694)
5,081
378
2,069
24,237
26,306
177
333
390
689
—
3,846
2,946
—
104
(1,830)
48
1,164
3,226
2,398
5,006
(31,616)
27,247
—
(1,941)
(198)
(6,508)
3,745
(662)
4,988
(399)
7,672
111
6,281
17,956
24,237
$
$
19
153
104
559
600
2,542
3,002
—
(68)
(328)
(905)
(483)
1,241
1,779
(10,425)
(24,800)
20,180
—
(4,894)
(409)
(9,923)
1,335
(643)
(14,900)
—
(14,208)
(586)
(35,142)
53,098
17,956
139
155
98
—
—
Trupanion, Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Description of Business
Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the Company) provides medical insurance for cats and dogs
throughout the United States, Canada and Puerto Rico. The Company believes its data-driven, vertically-integrated approach
makes its subscription the highest value for pet owners, with pricing specific to each pet’s unique characteristics. The Company
strives 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 pet acquisition cost, based on the Company's desired
return on investment.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
("GAAP") and 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 and related disclosures. Actual results could differ from such estimates.
Reclassifications
Certain prior year amounts have been reclassified within the Company’s consolidated financial statements from their original
presentation to conform to the current period presentation.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
At times, cash on deposit may be in excess of the applicable federal deposit insurance corporation limits.
The Company considers any cash account that is contractually restricted to withdrawal or use to be restricted cash. The
Company is party to a financing agreement requiring a restricted cash balance. As of December 31, 2017, the Company was in
compliance with all requirements.
Accounts and Other Receivables
Receivables are comprised of trade receivables and other miscellaneous receivables. Accounts and other receivables are carried
at their estimated collectible amounts.
Deferred Acquisition Costs
The Company incurs certain costs, including premium taxes, fees and enrollment-based bonuses, and referral fees that directly
relate to the successful acquisition of new or renewal customer contracts. These costs are deferred and are included in prepaid
expenses and other assets on the consolidated balance sheet and amortized over the related policy term to the applicable
financial statement line item, either sales and marketing expense or other cost of revenue. Deferred acquisition costs for the
years ended December 31, 2017, 2016 and 2015 were $1.0 million, $0.7 million and $0.6 million, respectively. Amortized
deferred acquisition costs classified within sales and marketing amounted to $1.7 million, $1.4 million and $1.5 million, and
amortized deferred acquisition costs classified within other cost of revenue amounted to $13.2 million, $10.7 million and $8.6
million, for the years ended December 31, 2017, 2016 and 2015, respectively.
Investments
The Company invests in investment grade fixed income securities of varying maturities. Long-term investments are classified
as available-for-sale and reported at fair value with unrealized gains and losses included in accumulated other comprehensive
loss. Short-term investments are classified as held-to-maturity and reported at amortized cost. Premiums or discounts on fixed
income securities are amortized or accreted over the life of the security and included in interest income. There have been no
realized gains and losses on sales of fixed income securities.
66
The Company evaluates whether declines in the fair value of its investments below book value are other-than-temporary. This
evaluation includes the Company's ability and intent to hold the security until an expected recovery occurs, the severity and
duration of the unrealized loss, 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.
Fair Value of Financial Instruments
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of
the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the
observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported
fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of
valuation inputs:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly
Level 3 - Unobservable inputs that reflect the Company's own assumptions about the assumptions market participants
would use in pricing the asset or liability
The Company's financial instruments, in addition to those presented in Note 6, Fair Value, include cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities. The carrying amounts of accounts receivable, accounts payable,
and accrued liabilities approximate fair value because of the short-term nature of these instruments.
Property and Equipment
Property and equipment primarily consists of internally-developed software related to the Company’s website, and internal
support systems, capitalized during the application development stage of the project. Property and equipment is recorded at cost
and depreciated using the straight-line method over the estimated useful life of the respective asset, estimated to be between
three and five years, once the asset is placed into service.
Intangible Assets
Indefinite-lived intangible assets are not amortized. The Company reviews these assets for impairment at least annually or if
indicators of potential impairment exist.
Asset Impairment
Long-lived assets, including property and equipment, are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be
measured as the amount the asset's carrying value exceeds its fair value. The Company has recognized no impairment loss on
long-lived assets for the years ended December 31, 2017, 2016, and 2015.
Reserve for Veterinary Invoices
Reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that are dated
as of, or prior to, its balance sheet date. The reserve also includes the Company's estimate of related internal processing costs.
To determine the accrual, the Company makes assumptions based on its historical experience, including the number of
veterinary invoices it expects to receive, the average cost of those veterinary invoices, the length of time between the date of
the veterinary invoice and the date the Company receives it, the member's chosen deductible, and the Company's expected cost
to process and administer the payments.
Deferred Revenue
Deferred revenue consists of subscription fees received or billed in advance of the subscription services within the Company's
subscription business, and the unexpired term of premiums related to the Company's unaffiliated general agents within the
other business segment.
Revenue Recognition
The Company generates revenue primarily from subscription fees and through underwriting policies for unaffiliated general
agents. Revenue is recognized pro-rata over the terms of the customer contracts.
67
Veterinary Invoice Expense
Veterinary invoice expense includes the Company’s costs to review veterinary invoices, administer the payments, and provide
member services, and other operating expenses directly or indirectly related to this process. The Company also accrues for
veterinary invoices that have been incurred but not yet received. This also includes amounts paid by unaffiliated general agents,
and an estimate of amounts incurred and not yet paid for the other business segment.
Other Cost of Revenue
Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, Territory
Partner renewal fees, credit card transaction fees and premium tax expenses. Other cost of revenue for the other business
segment includes the commissions the Company pays to unaffiliated general agents, costs to administer the programs in the
other business segment and premium taxes on the sales in this segment.
Technology and Development
Technology and development expenses consist primarily of personnel costs and related expenses for the Company’s technology
staff, which includes information technology development and infrastructure support, third-party services and depreciation of
hardware and capitalized software.
General and Administrative
General and administrative expenses consist primarily of personnel costs and related expenses for the Company’s finance,
actuarial, human resources, legal and general management functions, as well as facilities and professional services.
Sales and Marketing
Sales and marketing expenses consist of costs to educate veterinarians and consumers about the benefits of Trupanion, to
generate leads, and to convert leads to enrolled pets, as well as print, online and promotional advertising costs, and employee
compensation and related costs.
Other (Income) Expense, Net
Other income of $1.2 million for the year ended December 31, 2017 included the gain of $1.0 million from the sale of the
Company's equity method investment in June 2017. Interest income of $0.2 million, $0.1 million, and $0.1 million was
recorded in other income for the years ended December 31, 2017, 2016, and 2015, respectively.
Advertising
Advertising costs are expensed as incurred, with the exception of television advertisements, which are expensed the first time
each advertisement is aired. Advertising costs amounted to $4.9 million, $4.0 million and $5.3 million, in the years ended
December 31, 2017, 2016 and 2015, respectively.
Stock-Based Compensation
Compensation expense related to stock-based transactions, including employee and non-employee stock option awards, and
restricted stock awards, and restricted stock units, is measured and recognized in the financial statements based on fair value.
The fair value of restricted stock awards and restricted stock units is the common stock price as of the measurement date. The
fair value of stock options is estimated on the measurement date using the Black-Scholes option-pricing model that requires
management to apply judgment and make estimates, including:
• Expected volatility —The Company estimates the expected volatility based on the historical volatility of a
representative group of publicly traded companies with similar characteristics to the Company, and its own historical
volatility;
• Expected term for awards granted to employees —The Company has based its expected term for awards issued to
employees on the simplified method, as permitted by the SEC Staff Accounting Bulletin No. 110, Share-Based
Payment, as the Company has insufficient historical information regarding its stock options to provide a basis for an
estimate;
• 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; and
• Expected dividend yield—The Company has never declared or paid any cash dividends and does not presently plan to
pay cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero.
68
Stock-based compensation expense for stock options, restricted stock awards, and restricted stock units is recognized on a
straight-line basis over the requisite service period, which is generally the vesting period of the respective award. The Company
recognizes forfeitures when they occur.
Income Taxes
The Company uses the asset and liability approach for accounting and reporting income taxes. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities, and their respective tax bases, 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 of a tax rate change 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 Translation
The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities denominated in foreign
currencies were translated to U.S. dollars, the reporting currency, at the exchange rates in effect on the balance sheet date.
Revenue and expenses denominated in foreign currencies were translated to U.S. dollars using a weighted-average rate for the
relevant reporting period. Cumulative translation adjustments of $0.1 million, $0.4 million, and $0.4 million were recorded in
accumulated other comprehensive loss as of December 31, 2017, 2016, and 2015, respectively.
Insurance Operations
Effective January 1, 2015, the Company formed a segregated account in Bermuda as part of Wyndham Insurance Company
(SAC) Limited (WICL), and entered into a revised fronting and reinsurance arrangement with Omega General Insurance
Company (Omega) to include its newly formed segregated account. The Company maintains all risk with the business written
in Canada and consolidates the entity in its financial statements. Contractual requirements restrict dividends from this entity
until after 2016, at which time dividends will be allowed subject to the Segregated Accounts Company Act of 2000, which
allows for dividends only to the extent that the entity remains solvent and the value of its assets remain greater than the
aggregate of its liabilities and its issued share capital and share premium accounts.
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. Revenue recognized from the agreement in 2017, 2016 and 2015 was $47.1 million,
$36.5 million and $30.9 million, respectively and deferred revenue relating to this arrangement at December 31, 2017, 2016
and 2015 was $1.8 million, $1.3 million and $0.9 million, respectively. Reinsurance revenue was 19%, 19% and 21% of total
revenue in 2017, 2016 and 2015, respectively. Cash designated for the purpose of paying claims related to this reinsurance
agreement was $2.8 million, $2.1 million and $2.0 million at December 31, 2017, 2016 and 2015 respectively. In addition, as
required by the Office of the Superintendent of Financial institutions regulations related to the Company’s reinsurance
agreement with Omega, 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 but not reported claims.
As of December 31, 2017, the account balance was $2.2 million and the Company was in compliance with all requirements.
The Company has not transferred any risk to third-party reinsurers.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash
equivalents, and investments. 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.
69
Accounting Pronouncements Adopted during Period
In November 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU)
amending the accounting for income taxes and requiring all deferred tax assets and liabilities be classified as non-current in the
consolidated balance sheets. The Company adopted this ASU as of January 1, 2017 and has retrospectively applied the
provisions of this standard.
In March 2016, the FASB issued an ASU amending the accounting for employee share-based payments, including income tax
recognition and classification. The Company adopted this ASU as of January 1, 2017. As a result, the Company has elected to
use actual forfeitures in the estimate of stock-based compensation expense. Additionally, the guidance related to the accounting
for excess tax benefits and deficiencies resulted in an initial adjustment as of January 1, 2017 to the Company's net operating
loss deferred tax asset to eliminate the Company's existing windfall pool amounting to $4.3 million, which was offset by an
adjustment to the Company's valuation allowance. Finally, tax withholding of shares will be allowed up to the employee's
maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award, subject to the
Company's internal policies for making this election.
Recent Accounting Pronouncements
In February 2016, the FASB issued an ASU amending the lease presentation guidance. The ASU requires organizations that
lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheets. This ASU is
effective for fiscal years beginning after December 15, 2018 including interim periods within that reporting period, with early
adoption permitted. The Company has determined this guidance will require recognition of a lease liability and corresponding
asset on the consolidated balance sheets equal to the present value of minimum lease payments. The carrying amount of the
asset is derived from the amount of the lease liability at the end of each reporting period. The Company plans to adopt this
guidance as of January 1, 2019, and is in the process of evaluating the impact on its consolidated financial statements.
2. Net Loss per Share
Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the
period. Diluted net loss per share is calculated using the weighted-average number of shares of common stock plus, when
dilutive, potential common shares outstanding using the treasury-stock method. Potential common shares outstanding include
stock options, unvested restricted stock awards and restricted stock units, and warrants.
The following potentially dilutive equity securities were not included in the diluted earnings per common share calculation
because they would have had an antidilutive effect:
Stock options
Restricted stock awards and restricted stock units
Warrants
3. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
Software
Computer equipment and other
Property and equipment, at cost
Less: Accumulated depreciation
Property and equipment, net
As of December 31,
2017
2016
2015
4,006,399
4,123,023
4,871,949
256,842
810,000
352,996
810,000
472,384
869,999
December 31,
2017
2016
$
$
17,221
$
3,022
20,243
(12,375)
7,868
$
14,340
2,470
16,810
(8,346)
8,464
Depreciation expense related to property and equipment, inclusive of assets purchased on capital lease, was $4.2 million, $3.8
million and $2.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
70
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, 2017.
5. Investment Securities
The amortized cost, gross unrealized holding gains and losses, and fair value of available-for-sale and short-term investments
by major security type and class of security were as follows as of December 31, 2017 and 2016 (in thousands):
As of December 31, 2017
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, 2016
Available-for-sale:
Foreign deposits
Municipal bond
Short-term investments:
U.S. Treasury securities
Certificates of deposit
U.S. government funds
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
$
$
$
2,237
1,000
3,237
5,783
690
31,117
37,590
$
— $
—
— $
— $
1
—
1
$
— $
—
— $
(4) $
—
—
(4) $
2,237
1,000
3,237
5,779
691
31,117
37,587
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
$
$
$
1,587
1,000
2,587
5,791
707
23,072
— $
—
— $
— $
(8)
(8) $
— $
— $
—
—
—
—
29,570
$
— $
— $
1,587
992
2,579
5,791
707
23,072
29,570
$
$
$
$
$
$
$
$
Maturities of debt securities classified as available-for-sale were as follows (in thousands):
Available-for-sale:
Due after one year through five years
Due after five years through ten years
December 31, 2017
Amortized
Cost
Fair
Value
2,237
1,000
3,237
$
2,237
1,000
3,237
$
The Company evaluated its securities for other-than-temporary impairment and considers the decline in market value for the
securities to be primarily attributable to current economic and market conditions. For debt securities, the Company does not
intend to sell, nor is it more likely than not that the Company will be required to sell, the securities prior to the recovery of the
amortized cost basis which may be at maturity.
71
6. Fair Value
Investments
The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring
basis, and placement within the fair value hierarchy (in thousands):
Assets
Restricted cash
Foreign deposits
Municipal bond
Money market funds
Total
Assets
Restricted cash
Foreign deposits
Municipal bond
Money market funds
Total
As of December 31, 2017
Fair Value
Level 1
Level 2
$
$
$
$
600
$
600
$
2,237
1,000
5,167
2,237
—
5,167
9,004
$
8,004
$
—
—
1,000
—
1,000
As of December 31, 2016
Fair Value
Level 1
Level 2
600
$
600
$
1,587
992
7,033
1,587
—
7,033
10,212
$
9,220
$
—
—
992
—
992
The Company measures the fair value of restricted cash, foreign deposits, and money market funds based on quoted prices in
active markets for identical assets. The fair value of the municipal bond is based on either recent trades in inactive markets or
quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market
data.
Fair Value Disclosures
As of December 31, 2017, the Company's other long-term assets balance included a $2.5 million note receivable, recorded at its
estimated collectible amount. The Company estimates that the carrying value of the note receivable approximates the fair value.
The estimated fair value represents a Level 3 measurement within the fair value hierarchy, and is based on market interest rates
and the assessed creditworthiness of the third party.
The Company estimates the fair value of long-term debt based upon rates currently available to the Company for debt with
similar terms and remaining maturities. This is a Level 3 measurement. Based upon the terms of the debt, the carrying amount
of long-term debt approximated fair value at December 31, 2017.
7. Commitments and Contingencies
The following summarizes the Company's contractual commitments as of December 31, 2017 (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Long-term debt obligations(1) $
Operating lease obligations(2)
Capital leases(3)
Other obligations(4)
Total
$
— $
9,500
$
— $
— $
— $
— $
9,500
1,876
519
927
3,322
$
2,035
—
562
12,097
$
2,116
—
119
2,235
$
2,197
—
17
2,214
$
2,258
—
—
2,258
$
8,719
—
—
8,719
$
19,201
519
1,625
30,845
(1) Consists of a revolving line of credit. Excludes interest of the greater of 4.5% or 1.25% plus the prime rate (5.75% as of December 31, 2017).
(2) Consists of contractual obligations from non-cancellable office space under operating lease.
(3) Consists of contractual obligations from property and equipment purchased under capital lease.
(4) Consists of contractual obligations from non-cancellable vendor service agreements.
72
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 commenced in the third quarter of 2016. 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 $1.8 million, $1.2
million and $1.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Legal Proceedings
From time to time, the Company is subject to litigation matters and claims arising from the ordinary course of business,
including, but not limited to, claims of alleged infringement of trademarks, copyrights, and other intellectual property rights;
employment claims; coverage disputes with policyholders; disputes regarding general contracts; and regulatory or
governmental investigations or disputes. The Company records an estimated liability relating to such matters when it is both
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The outcomes of legal
proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to the Company's operating
results for a particular period. The Company reviews its estimates at least quarterly and makes adjustments to reflect the
outcome of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events
pertaining to a particular matter.
8. Reserve for Veterinary Invoices
The reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that are
dated as of, or prior to, its balance sheet date. The reserve also includes the Company's estimate of related internal processing
costs. The reserve estimate involves actuarial projections, and is based on management's assessment of facts and circumstances
currently known, and assumptions about anticipated patterns, including expected future trends in the number of veterinary
invoices the Company will receive and the average cost of those veterinary invoices. The reserve is made for each of the
Company's segments, subscription and other business, and are continually refined as the Company receives and pays veterinary
invoices. Changes in management's assumptions and estimates may have a relatively large impact to the reserve and associated
expense.
Reserve for veterinary invoices
Summarized below are the changes in the total liability for the Company's subscription business segment (in thousands):
Subscription
Reserve at beginning of year
Veterinary invoices during the period related to:
Current year
Prior years
Total veterinary invoice expense
Amounts paid during the period related to:
Current year
Prior years
Total paid
Non-cash expenses
Reserve at end of period
Year Ended December 31,
2017
2016
2015
$
8,538
$
5,384
$
4,278
155,623
(69)
155,554
144,802
7,777
152,579
454
123,823
813
124,636
115,314
5,832
121,146
336
$
11,059
$
8,538
$
95,390
30
95,420
89,768
4,239
94,007
307
5,384
The Company's reserve for the subscription business segment increased $2.6 million from $8.5 million at December 31, 2016
to $11.1 million at December 31, 2017. This change was comprised of $155.6 million in expense recorded during the period
less $152.6 million in payments of veterinary invoices. This $155.6 million in veterinary invoice expense incurred includes a
reduction of $0.1 million to the reserves relating to prior years, which is the result of ongoing analysis of recent payment
trends. The Company's adjustments to increase prior year reserves were $0.8 million and less than $0.1 million as a result of
analysis of payment trends in the years ended December 31, 2016 and 2015, respectively.
73
Summarized below are the changes in total liability for the Company's other business segment (in thousands):
Other Business
Reserve at beginning of year
Veterinary invoices during the period related to:
Current year
Prior years
Total veterinary invoice expense
Amounts paid during the period related to:
Current year
Prior years
Total paid
Non-cash expenses
Reserve at end of period
Year Ended December 31,
2017
2016
2015
$
983
$
890
$
829
14,739
(171)
14,568
13,053
801
13,854
—
9,027
(129)
8,898
8,048
757
8,805
—
$
1,697
$
983
$
7,983
(79)
7,904
7,095
748
7,843
—
890
The Company’s reserve for the other business segment increased $0.7 million from $1.0 million at December 31, 2016 to $1.7
million at December 31, 2017. This change was comprised of $14.6 million in expense recorded during the period less $13.9
million in payments of veterinary invoices. This $14.6 million in veterinary invoice expense incurred includes a reduction of
$0.2 million to the reserves relating to prior years, which is the result of ongoing analysis of recent payment trends. The
Company's adjustments to decrease prior year reserves were $0.1 million as a result of analysis of payment trends in each of the
years ended December 31, 2016 and 2015.
Veterinary invoice expenses
In the following tables, cumulative number of veterinary invoices represents the total number received as of December 31,
2017, by year the veterinary invoice relates to, referred to as the year of occurrence. If a pet is injured or becomes ill, multiple
trips to the veterinarian may result in several invoices. Each of these veterinary invoices is included in the cumulative number,
regardless of whether the veterinary invoice was paid. Information for years 2014 through 2016 is provided as required
supplementary information. Amounts in these tables are presented on a constant currency basis to remove the impact of
changes in the foreign currency exchange rate on development. The cumulative expenses as of the end of each year are
revalued using the currency exchange rate as of December 31, 2017.
The following table summarizes the development of veterinary invoice expense, on a constant currency basis, for the
Company's subscription business segment by year of occurrence (in thousands, except for cumulative number of veterinary
invoices data):
Subscription
Year of Occurrence
2014
2015
2016
2017
Cumulative veterinary invoice expenses
Reserve
Cumulative
number of
veterinary
invoices
As of December 31,
As of December 31,
2014
2015
2016
2017
2017
2017
(unaudited)
(unaudited)
(unaudited)
$
72,100
$
$
72,039
95,661
$
$
72,204
96,217
$
$
72,222
96,276
$ 125,127
$ 124,910
$ 156,580
$ 449,988
$
$
$
$
$
27
130
535
10,367
11,059
379,078
475,626
587,007
656,490
74
The following table summarizes the development of veterinary invoice expense, on a constant currency basis, for the
Company's other business segment by year of occurrence (in thousands, except for cumulative number of veterinary invoices
data):
Other Business
Year of Occurrence
2014
2015
2016
2017
Cumulative veterinary invoice expenses
Reserve
Cumulative
number of
veterinary
invoices
As of December 31,
As of December 31,
2014
2015
2016
2017
2017
2017
(unaudited)
(unaudited)
(unaudited)
$
5,966
$
$
5,889
7,974
$
$
$
5,888
7,846
9,028
$
$
$
$
$
5,895
7,850
8,844
14,741
37,330
$
$
$
$
$
—
—
11
1,686
1,697
34,587
46,900
59,243
95,182
Cumulative paid veterinary invoice expense
In the following tables, amounts are by year the veterinary invoice relates to, referred to as the year of occurrence. Amounts in
these tables are presented on a constant currency basis to remove the impact of changes in the foreign currency exchange rate.
The cumulative amounts paid as of the end of each year are revalued using the currency exchange rate as of December 31,
2017. Information for years 2014 through 2016 is provided as required supplementary information.
The following table summarizes the amounts paid for veterinary invoices, inclusive of related internal processing costs and
reported on a constant currency basis, for the subscription segment (in thousands):
Subscription
Year of Occurrence
2014
2015
2016
2017
Year Ended December 31,
2014
2015
2016
2017
(unaudited)
(unaudited)
(unaudited)
$
67,886
$
$
71,969
90,261
$
$
$
72,132
95,928
116,879
Total amounts unpaid and recorded as a liability
$
$
$
$
$
$
72,196
96,145
124,375
146,213
438,929
11,059
The following table summarizes the amounts paid for veterinary invoices, inclusive of related internal processing costs and
reported on a constant currency basis, for the other business segment (in thousands):
Other Business
Year of Occurrence
2014
2015
2016
2017
Year Ended December 31,
2014
2015
2016
2017
(unaudited)
(unaudited)
(unaudited)
$
5,137
$
$
5,887
7,086
$
$
$
5,887
7,842
8,049
Total amounts unpaid and recorded as a liability
$
$
$
$
$
$
5,895
7,850
8,833
13,055
35,633
1,697
75
9. Debt
The Company has a revolving line of credit of up to $30.0 million, secured by any and all interests in the Company's assets that
are not otherwise restricted. Interest on the revolving line of credit is payable monthly at the greater of 4.5% or 1.25% plus the
prime rate (5.75% at December 31, 2017). The borrowing agreement includes other ancillary services and letters of credit of up
to $4.5 million as of December 31, 2017. The facility also requires a deposit of restricted cash of $0.6 million. The agreement
was amended during the current year to extend the maturity date to December 2019. The credit agreement requires the
Company to comply with various financial and non-financial covenants. As of December 31, 2017, the Company was in
compliance with all covenants.
Borrowings on the revolving line of credit were limited to the lesser of $30.0 million and the total amount of cash and securities
held by the Company's insurance subsidiaries (American Pet Insurance Company and Wyndham Insurance Company (SAC)
Limited Segregated Account AX) as of December 31, 2017 and 2016. As of December 31, 2017, available borrowing capacity
on the line of credit was $18.7 million, with an outstanding balance of $1.8 million for ancillary services and letters of credit,
and borrowings under the facility of $9.5 million, recorded net of financing fees of $0.2 million.
10. Stock-Based Compensation
Stock-based compensation expense includes stock options, restricted stock awards, and restricted stock units granted to
employees and non-employees and has been reported in the Company’s consolidated statements of operations 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, 2017, 2016 and 2015 was as follows (in thousands):
Veterinary invoice expense
Other cost of revenue
Technology and development
General and administrative
Sales and marketing
Total stock-based compensation
Year Ended December 31,
2017
2016
2015
$
355
239
216
1,887
722
$
234
$
41
246
1,893
532
$
3,419
$
2,946
$
219
44
404
1,889
446
3,002
As of December 31, 2017, for all employees, the Company had 991,754 unvested stock options and 256,842 restricted stock
awards and restricted stock units that are expected to vest. Total stock-based compensation expense of $5.7 million related to
unvested stock options and $0.9 million related to unvested restricted stock awards and restricted stock units is expected to be
recognized over a weighted-average period of approximately 2.7 years and 1.3 years, respectively.
Stock Options
The grant date fair value of stock option awards are estimated on the date of grant using the Black-Scholes option-pricing
model. Valuation assumptions for the years ended December 31, 2017, 2016 and 2015 are presented in the following table:
Valuation assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Year Ended December 31,
2016
2015
5.04-6.25
3.0-6.25
2017
6.25
37.1%-39.8% 37.6%-42.1% 37.2%–49.4%
1.8%-2.2%
1.1%-2.0%
1.1%–2.0%
—%
—%
—%
76
The following table presents information regarding stock options granted, exercised and forfeited for the periods presented:
Number
of
Options
Weighted Average
Exercise
Price per Share
Outstanding as of December 31, 2014
5,112,556
$
Granted
Exercised
Forfeited
Outstanding as of December 31, 2015
Granted
Exercised
Forfeited
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited
Outstanding as of December 31, 2017
698,764
(632,829)
(306,542)
4,871,949
666,664
(1,119,367)
(296,223)
4,123,023
657,339
(670,823)
(103,140)
4,006,399
3.19
7.84
2.12
7.65
3.71
13.37
3.35
8.14
5.06
17.74
3.80
12.25
7.16
Aggregate
Intrinsic
Value
(in thousands)
$
21,116
—
3,703
—
29,644
—
11,980
—
43,185
—
10,392
—
88,578
Exercisable at December 31, 2017
2,998,099
$
4.50
$
74,278
As of December 31, 2017, stock options outstanding and stock options exercisable had a weighted average remaining
contractual life of 5.4 years and 4.3 years, respectively.
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, 2017, 2016, and 2015:
Year:
2015
2016
2017
Weighted Average
Grant Date Fair
Value per Share
Fair Value
of Options
Vested
(in thousands)
$
$
$
3.46
5.64
7.25
$
$
$
3,276
4,645
6,313
77
Restricted Stock Awards and Restricted Stock Units
The below table summarizes the Company’s restricted stock award and restricted stock unit activity for the years ending
December 31, 2017, 2016 and 2015:
Unvested shares as of December 31, 2014
Granted
Vested
Forfeited
Unvested shares as of December 31, 2015
Granted
Vested
Forfeited
Unvested shares as of December 31, 2016
Granted
Vested
Forfeited
Unvested shares as of December 31, 2017
11. Stockholders’ Equity
Number of
Shares
Weighted Average
Grant Date
Fair Value per
Share
584,385
$
2,385
(119,262)
—
467,508
—
(116,877)
—
350,631
23,659
(116,877)
(571)
256,842
$
4.77
7.26
4.80
—
4.77
—
4.77
—
4.77
30.19
4.77
30.19
4.77
As of December 31, 2017, the Company had 100,000,000 shares of common stock authorized and 30,121,496 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,
2017, 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, 2017 due to restrictions in its credit agreements.
Warrants
At December 31, 2017 and 2016, warrants to purchase 810,000 shares of the Company's common stock at $10.00 per share
remained outstanding. The warrants expire in 2018 and 2019.
78
12. Segments
The Company has two segments: subscription business and other business. The subscription business segment includes
monthly subscriptions fees related to the Company’s medical insurance which is marketed directly to consumers, while the
other business segment includes all other business that is not directly marketed to consumers.
The chief operating decision maker uses two measures to evaluate segment performance: revenue and gross profit.
Additionally, other operating expenses, such as sales and marketing expenses, are allocated to each segment and evaluated
when material. Interest and other expenses and income taxes are not allocated to the segments, nor included in the measure of
segment profit or loss. The Company does not analyze discrete segment balance sheet information related to long-term assets.
Revenue and gross profit of the Company’s segments were as follows (in thousands):
Revenue:
Subscription business
Other business
Veterinary invoice expense:
Subscription business
Other business
Other cost of revenue:
Subscription business
Other business
Gross profit:
Subscription business
Other business
Technology and development
General and administrative
Sales and marketing:
Subscription business
Other business
Operating loss
Year Ended December 31,
2017
2016
2015
$
218,354
$
173,356
$
133,406
24,313
242,667
155,554
14,568
170,122
21,329
8,166
29,495
41,471
1,579
43,050
9,768
16,820
18,886
218
14,874
188,230
124,636
8,898
133,534
16,685
4,723
21,408
32,035
1,253
33,288
9,534
15,205
15,029
218
19,104
(2,642) $
15,247
(6,698) $
$
13,557
146,963
95,420
7,904
103,324
14,008
4,402
18,410
23,978
1,251
25,229
11,215
15,558
15,151
80
15,231
(16,775)
The following table presents the Company’s revenue by geographic region of the member (in thousands):
United States
Canada
Total revenue
Year Ended December 31,
2017
2016
2015
$
$
195,297
47,370
242,667
$
$
151,361
36,869
188,230
$
$
116,585
30,378
146,963
Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2017 and 2016.
79
13. 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, American Pet Insurance Company, and one of 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.
New York law restricts the ability of the Company's insurance subsidiary in New York 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 New York State Department of Financial Services, the subsidiary's
primary regulator. 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. Under regulatory requirements at
December 31, 2017, 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 $0.2 million. This insurance subsidiary did not pay dividends to
the Company during the years ended December 31, 2017, 2016, and 2015.
The Company's insurance subsidiary in Bermuda is regulated by the Bermuda Monetary Authority. 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 be after the payment, 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. The value of its assets must remain greater than the aggregate of its
liabilities, issued share capital, and share premium accounts. Per our contractual agreements with Wyndham Insurance
Company (SAC) Limited, the allowable dividend is equivalent to the positive undistributed profit attributable to the shares.
This insurance subsidiary paid the Company a dividend of $2.7 million during the year ended December 31, 2017. No
dividends were paid during the years ended December 31, 2016 and 2015.
The statutory net income for 2017, 2016 and 2015 and statutory capital and surplus at December 31, 2017, 2016 and 2015, for
the Company’s insurance subsidiary in New York were as follows (in thousands):
Statutory net income
Statutory capital and surplus
As of December 31,
2017
2016
2015
$
7,507
$
4,081
$
37,190
30,451
1,386
26,068
As of December 31, 2017, the Company’s insurance subsidiary in New York maintained $37.2 million of statutory capital and
surplus which was above the required amount of $22.2 million of statutory capital and surplus to avoid additional regulatory
oversight. As of December 31, 2017 and 2016, the Company had $6.6 million on deposit with various states in which it writes
policies.
14. Related Parties
The Company is sometimes party to arrangements with the father and brother of the Company’s Chief Executive Officer, who
both serve as independent contractors to develop veterinary relationships. The terms of the independent contractor agreements
are consistent with the terms of other similar independent contractors that do business with the Company. Total amounts paid to
the related parties were less than $0.5 million for each year ended December 31, 2017, 2016, and 2015.
15. Income Taxes
Loss before income taxes was as follows for the years ended December 31, 2017, 2016 and 2015 (in thousands):
United States
Foreign
Year Ended December 31,
2017
2016
2015
$
$
(1,965) $
34
(1,931) $
(6,906) $
48
(6,858) $
(17,222)
131
(17,091)
80
The components of income tax (benefit) expense were as follows (in thousands):
Year Ended December 31,
2017
2016
2015
Current:
U.S. federal & state
Foreign
Deferred:
U.S. federal & state
Foreign
$
183
$
15
198
(620)
(6)
(626)
(428) $
25
13
38
—
—
—
38
$
$
31
84
115
—
(1)
(1)
114
Income tax (benefit) expense
$
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to
the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease to 21% effective January 1, 2018. The
Company has calculated its best estimate of the impact of the Tax Act for the year ended December 31, 2017, based on its
understanding of the Tax Act and guidance available as of the date of filing, and recorded an income tax benefit of $0.6 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in
situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations)
in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the
Company has determined that the $0.6 million income tax benefit recorded in connection with the remeasurement of its
deferred tax liabilities was a provisional amount and a reasonable estimate as of December 31, 2017. Any necessary subsequent
adjustments will be recorded in 2018.
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
U.S. state income taxes
Equity compensation
Change in valuation allowance
Meals and entertainment
Other, net
Change in federal tax rate
Credits
Effective income tax rate
Year Ended December 31,
2017
2016
2015
34.0%
(9.5)
189.1
(229.6)
(3.0)
2.0
32.1
7.1
22.2%
34.0 %
34.0 %
(0.6)
7.7
(40.5)
(0.9)
(0.3)
—
—
(0.7)
(1.2)
(34.2)
(0.4)
1.8
—
—
(0.6)%
(0.7)%
81
The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Unearned premium reserves
Accruals and reserves
Net operating loss carryforwards
Depreciation and amortization
Equity compensation
Credits
Other
Total deferred tax assets
Deferred tax liabilities:
Deferred costs
Intangible assets
Total deferred tax liabilities
Total deferred taxes
Less deferred tax asset valuation allowance
Net deferred tax liability
Year Ended December 31,
2017
2016
$
966
606
18,211
317
1,024
208
270
21,602
(183)
(1,002)
(1,185)
20,417
(21,419)
(1,002) $
918
782
22,632
535
1,137
—
101
26,105
(226)
(1,623)
(1,849)
24,256
(25,879)
(1,623)
$
$
At December 31, 2017, the Company had federal net operating loss carryforwards of $86.7 million and federal credits of $0.2
million. Use of the carryforwards is limited based on the future income of the Company. The federal net operating loss
carryforwards currently would begin to expire in 2026. 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. As of December 31, 2017, the utilization of approximately $0.5 million of net operating losses are subject to
limitation as a result of prior ownership changes; however, subsequent ownership changes may further affect the limitation in
future years.
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 as of
December 31, 2017 and 2016 because the Company’s management has determined that it is more likely than not that these
assets will not be fully realized.
The Company intends to reinvest all foreign earnings indefinitely outside of the U.S.
The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2014 through 2017.
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, 2013 through 2017 for all corporate tax matters, and open for the years ended December 31,
2009 through 2017 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. No significant changes in uncertain tax positions are
expected in the next twelve months.
82
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
Year Ended December 31,
2017
2016
2015
Balance, beginning of year
Increases to tax positions related to prior periods
Increases to tax positions related to the current year
Balance, end of year
$
$
120
$
91
116
327
$
80
—
40
$
120
$
65
—
15
80
18. 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.
17. Quarterly Financial Information (Unaudited)
The following table contains quarterly financial data for the years ended December 31, 2017 and 2016 (in thousands, except per
share data). The unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial
statements and includes all adjustments that the Company considers necessary for a fair presentation of the information shown.
The operating results for any fiscal quarter are not necessarily indicative of the operating results for a full fiscal year or any
future period and there can be no assurances that any trend reflected in such results will continue in the future.
Dec. 31,
2017(1)
Sept. 30,
2017
Jun. 30,
2017(2)
Mar. 31,
2017
Dec. 31,
2016
Sept. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Three Months Ended
Total revenues
$
66,545
$
63,118
$
58,275
$
54,729
$
51,340
$
48,359
$
45,832
$
42,699
Gross profit
Net (loss) income
Net (loss) income per share:
Basic and diluted
11,737
(838)
11,807
406
10,351
411
9,155
(1,482)
9,218
(1,723)
8,500
(1,637)
8,266
(964)
7,304
(2,572)
(0.03)
0.01
0.01
(0.05)
(0.06)
(0.06)
(0.03)
(0.09)
Weighted-average common shares outstanding:
Basic
Diluted
29,847,574
30,037,282
29,510,907
29,254,681
29,020,559
28,732,417
28,348,348
27,999,248
29,847,574
33,113,981
32,734,624
29,254,681
29,020,559
28,732,417
28,348,348
27,999,248
(1) The Company recorded a tax benefit as of December 31, 2017, as a result of the Tax Act. See "Note 15" for additional information regarding this tax
benefit.
(2) The Company sold an equity method investment during the second quarter of 2017. See "Note 1" for additional information regarding the sale.
83
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, 2017 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, 2017, 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, 2017 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.
84
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 2018 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 2018 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 2018 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 2018 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 2018 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.
85
Item 15. Exhibits, 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.
Item 16. Form 10-K Summary
None.
86
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 13th day of February, 2018.
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, Tricia Plouf 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.
87
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
Date: February 13, 2018
/s/ Darryl Rawlings
Darryl Rawlings
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Tricia Plouf
Tricia Plouf
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
88
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 INDEX
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
Incorporated by Reference
Filed/
Furnished
Exhibit Filing Date Herewith
Exhibit Description
Form
File No.
Exhibit
Restated Certificate of Incorporation of the
Registrant.
10-Q
001-36537
Certificate of Amendment to the Restated
Certificated of Incorporation of Trupanion Inc.
8-K
001-36537
Restated Bylaws of the Registrant.
10-Q
001-36537
Form of Common Stock Certificate.
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
S-1
333-196814
333-196814
3.1
3.1
3.2
4.1
4.4
8/28/2014
6/3/2016
8/28/2014
6/16/2014
6/16/2014
99.1
Board resignation letter, dated February 2,
2018, between Glenn Novotny and Trupanion,
Inc.
10.1+
Form of Indemnity Agreement.
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.
10.4+
2014 Employee Stock Purchase Plan.
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
Amended and Restated Employment
Agreement, dated April 20, 2007, by and
between the Registrant and Darryl Rawlings.
Consulting Agreement, dated May 5, 2014, by
and between the Registrant and Howard Rubin.
First Amendment to Consulting Agreement,
dated January 1, 2016, by and between the
Registrant and Howard Rubin.
Second Amendment to Consulting Agreement,
dated January 1, 2017 by and between the
Registrant and Howard Rubin.
Employment Agreement, dated January 13,
2017, by and between the Registrant and Tim
Graff.
Compensation Program for Non-Employee
Directors of Trupanion, Inc. dated February 6,
2018
Senior Credit Facility Loan and Security
Agreement, entered into as of December 16,
2016 between Pacific Western Bank, Western
Alliance Bank and Trupanion, Inc.
First Amendment to Senior Credit Facility
Loan and Security Agreement, dated March 31,
2017 between Pacific Western Bank, Western
Alliance Bank and Trupanion, Inc.
8-K
001-36537
99.1
2/8/2018
S-1
S-1
333-196814
333-196814
10.1
10.2
6/16/2014
6/16/2014
S-1
333-196814
10.3
6/16/2014
S-1
S-1
333-196814
333-196814
10.4
10.6
6/16/2014
6/16/2014
S-1
333-196814
10.8
6/16/2014
10-Q
001-36537
10.2
5/5/2016
10-K
001-36537
10.13
2/15/2017
10-K
001-36537
10.14
2/15/2017
8-K
001-36537
10.1
2/8/2018
10-K
001-36537
10.15
2/15/2017
10-Q
001-36537
10.1
5/2/2017
89
10-Q
001-36537
10.1
11/2/2017
10-Q
001-36537
10.2
11/2/2017
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
10-K
001-36537
10.16
2/24/2017
10-K
001-36537
10.17
2/24/2017
10.13+
10.14+
10.15+
10.16+
10.17†
10.18+
10.19+
10.20+
21.1
23.1
24.1
31.1
31.2
32.1*
32.2*
Second Amendment to Senior Credit Facility
Loan and Security Agreement, dated
September 28, 2017 between Pacific Western
Bank, Western Alliance Bank and Trupanion,
Inc.
Second Amendment to Lease Agreement, dated
October 20, 2017 between Benaroya Capital
Company, LLC and Trupanion, Inc.
Agency Agreement between Omega General
Insurance Company and Trupanion Brokers
Ontario, Inc., effective January 1, 2015.
Fronting and Administration Agreement
between Wyndham Insurance Company (SAC)
Limited and Omega General Insurance
Company, effective January 1, 2015.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2015.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2016.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2017.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2018.
Subsidiaries of the Registrant.
Consent of independent registered public
accounting firm.
Power of Attorney (reference is made to the
signature page hereto)
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.
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.
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.
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.
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition
Linkbase Document.
90
X
X
X
X
X
X
X
X
X
X
X
X
101.LAB XBRL Taxonomy Extension Label Linkbase
Document.
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document.
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.
91
Schedule I - Condensed Financial Information of Registrant
Trupanion, Inc.
Condensed Statements of Comprehensive Loss
(Parent Company Only, in thousands)
Year Ended December 31,
2017
2016
2015
$
269
$
354
239
528
4,204
889
6,214
(6,214)
529
(4,101)
(2,642)
5,302
(4,163)
(1,503) $
285
285
(1,218) $
41
531
3,627
871
5,339
(5,339)
218
23
(5,580)
—
(1,316)
(6,896) $
125
125
(6,771) $
226
44
628
3,852
621
5,371
(5,371)
325
(2)
(5,694)
—
(11,511)
(17,205)
(513)
(513)
(17,718)
Expenses:
Veterinary invoice expense
Other cost of revenue
Technology and development
General and administrative
Sales and marketing
Total expenses
Operating loss
Interest expense
Other (income) expense, net
Loss before equity in undistributed earnings of subsidiaries
Income tax benefit (expense)
Equity in undistributed earnings of subsidiaries
Net loss
Other comprehensive income (loss), net of taxes:
Other comprehensive income (loss) of subsidiaries
Other comprehensive income (loss)
Comprehensive loss
$
$
$
92
Trupanion, Inc.
Condensed Balance Sheets
(Parent Company Only)
(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts and other receivables
Prepaid expenses and other assets
Total current assets
Restricted cash
Equity method investment
Property and equipment, net
Intangible assets, net
Other long term assets
Advances to and investments in subsidiaries
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, accrued liabilities, and other liabilities
Total current liabilities
Long-term debt
Deferred tax liabilities
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock: $0.00001 par value per share, 100,000,000 shares authorized at December 31,
2017 and December 31, 2016, 30,778,796 and 30,121,496 shares issued and outstanding at
December 31, 2017; 30,156,247 and 29,498,947 shares issued and outstanding at December 31,
2016
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31,
2017 and December 31, 2016, and 0 shares issued and outstanding at December 31, 2017 and
December 31, 2016
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock, at cost: 657,300 shares at December 31, 2017 and December 31, 2016
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2017
2016
$
1,105
$
$
$
2,261
295
3,661
600
—
661
4,795
2,488
47,209
59,414
$
$
654
654
9,324
1,002
—
10,980
—
—
134,511
(92)
(82,784)
(3,201)
48,434
$
59,414
$
3,401
1,492
106
4,999
600
271
1,070
4,773
—
40,086
51,799
492
492
4,767
1,622
203
7,084
—
—
129,574
(377)
(81,281)
(3,201)
44,715
51,799
93
Trupanion, Inc.
Condensed Statements of Cash Flows
(Parent Company Only, in thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Loss attributable to investments in subsidiaries
Depreciation and amortization
Stock-based compensation expense
Gain on sale of equity method investment
Other, net
Changes in operating assets and liabilities
Net cash provided by (used in) operating activities
Investing activities
Proceeds from sale of equity method investment
Purchases of property and equipment
Advances to and investments in subsidiaries
Other investments
Net cash used in investing activities
Financing activities
Proceeds from exercise of stock options
Taxes paid related to net share settlement of equity awards
Proceeds from (repayment of) debt financing, net of financing fees
Other financing
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash, cash equivalents, and
restricted cash, net
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Supplemental disclosures
Interest paid
Noncash investing and financing activities:
Property and equipment acquired under capital lease
Cashless exercise of common stock warrants
Year Ended December 31,
2017
2016
2015
$
(1,503) $
(6,896) $
(17,205)
4,163
697
3,419
(1,036)
(380)
743
6,103
1,402
(135)
(12,168)
(2,668)
(13,570)
2,545
(1,170)
4,400
(604)
5,170
—
(2,296)
4,001
1,316
251
2,946
—
58
1,742
(583)
—
1
(9,333)
—
(9,332)
3,745
(662)
4,988
(195)
7,876
—
(2,039)
6,040
$
1,705
$
4,001
$
333
471
—
153
—
600
11,511
126
3,002
—
21
(1,383)
(3,928)
—
(149)
(19,900)
(300)
(20,349)
1,335
(643)
(14,900)
—
(14,208)
(517)
(39,002)
45,042
6,040
155
—
—
94
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. Certain prior year amounts have been
reclassified within the accompanying condensed financial statements from their original presentation to conform to the current
period presentation. For the year ended December 31, 2017, Trupanion, Inc. recorded a cash dividend received from a
subsidiary of $2.7 million within other income. This dividend is eliminated within the consolidated financial statements of
Trupanion, Inc.
Additional information about Trupanion, Inc.’s accounting policies pertaining to intangible assets, commitments and
contingencies, debt financing, stock-based compensation, stockholders’ equity, and income taxes are set forth in Notes 4, 7, 9,
10, 11 and 15, respectively, to the Consolidated Financial Statements.
95