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01
Table 1. Key Metrics
2014
2015
2016
2017
2018
2019
Revenue
$115.9M
$147.0M
$188.2M
$242.7M
$304.0M
$383.9M
YoY revenue
growth
Adjusted operating
income (AOI)
Adjusted
Operating Margin
(AOM)
38%
27%
28%
29%
25%
26%
$0.9M
$3.6M
$14.8M
$23.4M
$31.9M
$44.2M
1%
2%
8%
10%
10%
12%
Pet acquisition cost
$11.1M
$14.8M
$14.7M
$18.4M
$23.7M
$33.3M1
Internal rate of
return (from new
subscription pets)
N/A
N/A
31%
35%
37%
40%2
Free cash flow
($16.4M)
($15.3M)
$3.1M
$6.5M
$8.3M3
$10.8M
1The $33.3M acquisition spend noted in this table includes spend in our other business segment,
$32.9M of which was spent acquiring subscription pets in 2019.
2In 2019, we began to use the per pet unit economics specific to our subscription business as an
input for our internal rate of return calculation. Prior to 2019, per pet unit economics reflected our
consolidated business.
32018 free cash flow of $8.3 million reflects free cash flow of ($44.3) million, adjusted to exclude
the $52.5 million used to purchase our building.
Table 2. Financial Metrics/Performance 2012-2019
Year Enrolled pets
Revenue
YoY revenue
growth
2012
2013
2014
2015
2016
2017
2018
2019
127,704
182,497
$55.5M
$83.8M
232,450
$115.9M
291,818
$147.0M
343,649
$188.2M
423,194
$242.7M
521,326
$304.0M
646,728
$383.9M
50%
51%
38%
27%
28%
29%
25%
26%
Adjusted
operating
income
Invested
capital to
acquire new
pets
IRR on an
average pet
Cash, short-term
investments, our
building assets,
minus debt
Earnings (Net
Loss)
$6.7M
$8.4M
$11.1M
$14.8M
$14.7M
$18.4M
$23.7M
$33.3M
N/A
N/A
N/A
N/A
31%
35%
37%
40%
$5.1M
$7.9M
($8.1M)
($8.2M)
$60.6M
($21.2M)
$43.2M
($17.2M)
$48.8M
($6.9M)
$54.4M
($1.5M)
$134.7M
($0.9M)
$139.4M
($1.8M)
$3.0M
$4.3M
$0.9M
$3.6M
$14.8M
$23.4M
$31.9M
$44.2M
02
Table 3. Key Financial Metrics Per Share
Year
2012
2013
2014
2015
2016
2017
2018
2019
Total share
count plus
options, awards
and warrants
granted1
Revenue
per share
YoY
growth
YoY
growth
Adjusted
operating
income
per share
Cash, short-term
investments, our
building assets,
minus debt per
share
YoY
growth
Earnings
(loss) per
share2
22,467,205
$2.47
53%
$0.13
-7%
$0.23
-30%
$(9.76)
24,889,316
$3.37
36%
$0.17
31%
$0.32
39%
$(6.23)
33,813,736
$3.43
2%
$0.03
-82%
$1.79
459%
$(1.64)
34,138,237
$4.31
26%
$0.11
267%
$1.27
-29%
$(0.62)
34,879,610
$5.40
25%
$0.42
282%
$1.40
10%
$(0.24)
35,444,460
$6.85
27%
$0.66
57%
$1.53
9%
$(0.05)
37,862,666
$8.03
17%
$0.85
28%
$3.56
133%
($0.03)
37,951,839
$10.12
26%
$1.16
37%
$3.67
3%
($0.05)
1Share count includes outstanding shares plus unexercised options and unvested restricted stock,
as well as shares granted in subsequent year pertaining to the year’s performance.
2Loss per share is calculated using the GAAP basic weighted-average shares at year end.
03
Table 4. Business Segments
Subscription
Business
Other Business
Total
Business
Subscription
Business
Other Business
Total
Business
Revenue
Less: Paying Veterinary Invoices
Less: Variable Expenses
Less: Fixed Expenses
Equals Adjusted Operating Margin
(AOM) or Income (AOI)
100%
72%
9%
6%
13%
100%
100%
$321.2M
$62.8M
$383.9M
61%
29%
6%
70%
12%
6%
$231.7M
$38.5M
$270.3M
$29.4M
$18.3M
$47.7M
$18.2M
$3.6M
$21.7M
4%
12%
$41.9M
$2.3M
$44.2M
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0
Existing Pets New Pets
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
04
05
06
07
09
10
12000
10000
8000
6000
4000
2000
0
2
1
0
2
/
1
/
3
2
1
0
2
/
1
/
0
1
3
1
0
2
/
1
/
5
3
1
0
2
/
1
/
2
1
4
1
0
2
/
1
/
7
5
1
0
2
/
1
/
2
5
1
0
2
/
1
/
9
6
1
0
2
/
1
/
4
6
1
0
2
/
1
/
1
1
7
1
0
2
/
1
/
6
8
1
0
2
/
1
/
1
8
1
0
2
/
1
/
8
9
1
0
2
/
1
/
3
9
1
0
2
/
1
/
0
1
1.2
1.15
1.1
1.05
1
0.95
0.9
0.85
0.80
Table 5. Predictive Accuracy Of New Pet Assumptions
Year
2012
2013
2014
2015
2016
2017
2018
2019
Number
of
Territory
Partners
Estimated
number of clinics
we are visiting
every 60-90 days
Estimated
aggregate
number of face-
to-face visits
Actual
average
number
of active
hospitals
YOY
percentag
change
Actual average
number of new
pets per Hospital
per month
YOY
change
Predicted
new pets
Predictive
accuracy
Actual
number
of new
pets
34
40
58
84
105
107
123
130
15,000
16,200
15,400
19,000
21,300
19,800
20,200
21,600
262,000
5,034
324,000
5,531
404,000
6,098
490,000
7,359
577,000
7,875
662,000
8,242
751,000
9,279
852,000
10,315
5%
10%
10%
21%
7%
5%
13%
11%
0.918
0.100
1.008
0.090
-
-
-
-
-
-
1.053
0.045
82,969
77,066
93%
1.093
0.040
89,704
96,556
108%
1.066
-0.028
115,568
100,692
1.063
-0.002
115,465
105,180
87%
91%
1.133
0.070
116,899
126,182
108%
1.141
0.008
137,981
141,283
102%
98.2%
11
1
Step 1:
7% avg. growth rate ‘16
5% avg. growth rate ‘17
+ 13% avg. growth rate ‘18
25
÷ 3 years
8.1% predicted avg. growth rate ‘19
Step 2:
9,279 active hospitals ‘18
x 8.1% predicted avg. growth rate ‘19
751 predicted new active hospitals ‘19
9,279 active hospitals ‘18
+ 751 predicted new active hospitals ‘19
10,029 total active hospitals ‘19
Step 3:
-0.028 YoY change of pets in enrolled ‘16
- 0.002 YoY change of pets in enrolled ‘17
+ 0.070 YoY change of pets in enrolled ‘18
0.040
÷ 3 years
0.013 avg. YoY change ‘16-’18
+1.133 avg. new pets per hospital per month ‘18
1.146 predicted same store sales ‘19
Step 4: 10,029 predicted total active hospitals ‘19
x 1.146 predicted same store sales ‘19
11,498 predicted new pets per month ‘19
11,498 predicted new pets per month ‘19
x 12 months
137,981 predicted new subscription pets ‘19
12
Table 6. 2018 Churn By Rate Change
2018 Churn
Active Pets at Year
End
Number of Cancelled
Pets
Percentage of Pets in
2018
Monthly Churn
Monthly
Retention
No Rate Change
(New Pets)
Rate Change < 20%
Rate Change > 20%
Total
86,914
290,719
53,137
430,770
26,960
30,000
10,135
67,095
20.18%
67.49%
12.34%
100.00%
2.79%
0.93%
1.69%
1.40%
97.21%
99.07%
98.31%
98.60%
13
2
Table 7. Net New Subscription Pets, Year 1 Churn
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
2019
Remaining
subscription
pets from prior
month
New
subscription
11,177
22,042
32,604
42,871
52,852
62,554
71,986
81,155
90,068
98,732
107,154
pets 11,498
11,498
11,498
11,498
11,498
11,498
11,498
11,498
11,498
11,498
11,498
11,498
Monthly churn
For new pets
added in year 1
at 2.79%
Monthly churn
for remaining
subscription
pets at 2.79%
Total 2019
cohort of new
pets
(321)
(321)
(321)
(321)
(321)
(321)
(321)
(321)
(321)
(321)
(321)
(321)
-
(312)
(615)
(910)
(1,196)
(1,475)
(1,745)
(2,008)
(2,264)
(2,513)
(2,755)
(2,990)
11,177
22,042
32,604
42,871
52,852
62,554
71,986
81,155
90,068
98,732
107,154
115,341
115,341
The above shows 2019 gross pet adds averaged throughout the year. In reality, new pets
added build throughout the year and vary based on seasonality and the number of days in a
month. The variable enrollment growth within a year adds complexity without any meaningful
change to the ultimate calculation.
Step 1:
11,498 new subscription pets in Jan ‘19
x 2.79% monthly churn with no rate change in ‘18 (see Table 6)
321 predicted cancellations in Jan ‘19
11,498 new subscription pets in Jan ‘19
– 321 predicted cancellations in Jan ‘19
11,177 remaining pets enrolled from this cohort at the end of Jan ‘19
Step 2:
11,177 remaining pets enrolled from this cohort at the end of Jan ‘19
x 2.79% monthly churn with no rate change (‘18)
312 predicted cancellations in Feb ‘19 for new subscription pets in Jan ‘19
11,177 remaining pets enrolled from this cohort at the end of Jan ‘19
– 312 predicted cancellations in Feb ‘19 for new subscription pets in Jan ‘19
– 321 predicted cancellations in Feb ‘19 for new subscription pets in Feb ‘19
+ 11,498 new subscription pets in Jan ‘19
22,042 remaining pets enrolled from this cohort at the end of Feb ‘19
Step 3: Repeat Step 2 for every month through December to calculate the total
retained pets who enrolled in the first year: 115,341.
3
Table 8. Monthly Retention of Existing Pets
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
2019
Pets who
have been
enrolled
longer
than a
year
Monthly
churn of
1.05%
Remaining
pets who
have been
enrolled
longer
than a
year
430,770 426,247 421,771
417,342
412,960
408,624
404,333
400,088
395,887 391,730
387,617 383,547
(4,523)
(4,476)
(4,429)
(4,382)
(4,336)
(4,291)
(4,245)
(4,201)
(4,157)
(4,113)
(4,070)
(4,027)
426,247
421,771
417,342 412,960
408,624
404,333
400,088
395,887
391,730
387,617 383,547 379,520 379,520
Step 1:
430,770 subscription enrolled pets as of December 31, 2018
x 1.05% monthly churn
4,523 Jan churn
430,770 subscription enrolled pets as of December 31, 2018
– 4,523 Jan churn
426,247 remaining pets who have been enrolled longer than a year at the end of Jan ‘19
Step 2:
426,247 remaining pets who have been enrolled longer than a year at the end of Jan ‘19
x 1.05% monthly churn
4,476 Feb churn
426,247 remaining pets who have been enrolled longer than a year at the end of Jan ‘19
– 4,476 Feb churn
421,771 remaining pets who have been enrolled longer than a year at the end of Feb ‘19
Step 3: Repeat Step 2 for every month through December to calculate remaining pets who have
been enrolled longer than a year at the end of 2019: 379,520.
15
4
Table 9. Subscription Pet Months
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
2019
Total 2019
cohort
retained
new pets
Total
retained
existing
11,177
22,042
32,604
42,871
52,852
62,554
71,986
81,155
90,068
98,732
107,154 115,341
pets 426,247 421,771 417,342 412,960 408,624 404,333 400,088 395,887 391,730
387,617 383,547 379,520
Total
retained
pets 437,424 443,813 449,946 455,831 461,476 466,887 472,074 477,042 481,798 486,349 490,701 494,861
5,618,202
Pet
Months
Note that the sum of the bottom row of Table 9 is 5,618,202, which is what we call pet months.
The above calculation is a simplified illustrative example compared to our actual model, and
when we factor in the impact of new pets added in 2018 that have higher cancellations for
a portion of 2019; the total pet months projected for 2019 was 5,602,431 in our model. This is
the number of subscription “pet months” we would use to project 2019 in our DCF model. Pet
months is a metric that we commonly use within the company and it will come up later in the
model analysis.
437,424 Jan
443,813
Feb
Mar
449,946
Apr
455,831
May
461,476
Jun
466,887
Jul
472,074
Aug
477,042
Sept
481,798
Oct
486,349
Nov
490,701
Dec
+ 494,861
5,618,202 pet months ‘19
Table 10. 2019 Churn By Rate Change
2019 Churn
Active pets at
year end
Number of
canceled pets
Distribution Monthly
Churn
Monthly
Retention
No Rate Change
Rate Change < 20%
Rate Change > 20%
Total
100,008
30,155
20.24%
2.70%
97.30%
306,681
34,138
62.08%
1.00%
99.00%
87,337
13,734
17.68%
1.41%
98.59%
494,026
78,027
100.00%
1.42%
98.58%
16
5
Table 11. 2018 Per Pet Monthly Economics
Average monthly cost (ARPU)
$54.34
100.0%
2018
– Paying veterinary invoices (COGS)
($39.33)
– Variable expense (fast, 24/7 service)
($5.08)
= Contribution profit
$9.93
– Fixed expenses (G&A + IT)
($3.65)
= Profit per pet per month
$6.28
– a 1% capital charge
($0.54)
= the cash generated per month for the average pet
$5.74
72.4%
9.3%
18.3%
6.7%
11.6%
1.0%
10.6%
17
Table 12. Cash Flow Per Month Margin Examples
Average monthly cost (ARPU)
100%
100%
100%
Example 1
Example 2
Example 3
– Paying veterinary invoices (COGS)
– Variable expense (fast, 24/7 service)
– Fixed expenses (G&A + IT)
= Adjusted operating margin
– Capital charge for money we are required to hold in cash or assets
= Cash generated per month for the average pet after a capital charge
68%
11%
6%
15%
1%
14%
71%
9%
5%
15%
1%
14%
73%
8%
4%
15%
1%
14%
1818
Table 13. Per Pet Unit Economics–Predicated Vs Actual
2018 Actuals
2019 Predicted
2019 Actuals
Average monthly cost (ARPU)
$54.34
100.0%
$57.32
100.0%
$57.52
100.0%
– Paying veterinary invoices (COGS)
($39.33)
72.4% ($40.99)
71.5% ($41.56)
72.2%
– Variable expense (fast 24/7 service)
($5.08)
9.3%
($5.45)
9.5%
($5.27)
9.2%
= Contribution profit
$9.93
18.3%
$10.88
19.0%
$10.69
18.6%
– Fixed expenses (G&A + IT)
($3.65)
6.7%
($3.29)
5.7%
($3.26)
5.7%
= Profit per pet per month
$6.28
11.6%
$7.59
13.2%
$7.43
12.9%
- Capital charge for money we are required to hold in cash or assets
($0.54)
1.0%
($0.57)
1.0%
($0.58)
1.0%
= Cash generated per month for the average pet
$5.74
10.6%
$7.02
12.2%
$6.85
11.9%
1919
Table 14. Predictive Accuracy Of Cash Generated By The Average Subscription Pet
Monthly cash generated from
the average subscription pet
Total Pet Months
Total cash generated
from subscription pets
2019 Predicted
2019 Actual
$7.02
5,602,431
$6.85
5,575,670
$39.3M
$38.2M
Table 15. Discounted Cash Flow Model Inputs 1.1
Monthly cash generated from the
average subscription pet
Total pet months
Total cash generated
subscription pets
2018 Actual
2019 Actual
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
$5.74
$6.85
$7.78
$8.47
$9.18
$9.81
$10.32
$10.86
4,843,802
5,575,670
6,407,329
7,280,343
8,242,219
9,304,305
10,479,007
11,781,547
$11.43
13,230,666
$12.04
$12.68
$13.37
$14.09
$14.86
14,850,112
16,667,751
18,707,901
20,997,766
23,567,914
$15.67
26,452,650
$27.8M
$38.2M
$49.9M
$61.7M
$75.6M
$91.3M
$108.1M
$127.9M
$151.2M
$178.8M
$211.4M
$250.1M
$295.9M
$350.1M
$414.4M
6
21
Table 16. Discounted Cash Flow Model Inputs 1.2
Monthly cash
generated from
the average
subscription pet
Total Pet
Months
Total cash
generated
subscription pets
Total cash
generated
other pets
Total cash
generated
2018 Actual
2019 Actual
$5.74
4,843,808
$27.8M
$0.5M
$28.3M
$6.85
5,575,676
$38.2M
$1.7M
$39.9M
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
$7.78
6,407,329
$49.9M
$1.6M
$51.5M
$8.47
7,280,343
$61.7M
$2.3M
$64.0M
$9.18
8,242,219
$75.6M
$3.1M
$78.7M
$9.81
9,304,305
$91.3M
$4.0M
$95.3M
$10.32
10,479,007
$108.1M
$4.8M
$112.9M
$10.86
11,781,547
$127.9M
$5.7M
$133.6M
$11.43
13,230,666
$151.2M
$6.9M
$158.1M
$12.04
14,850,112
$178.8M
$8.2M
$187.0M
$12.68
16,667,751
$211.4M
$9.9M
$221.3M
$13.37
18,707,901
$250.1M
$11.8M
$261.9M
$14.09
20,997,766
$295.9M
$14.3M
$310.2M
$14.86
23,567,914
$350.1M
$17.2M
$367.3M
$15.67
26,452,650
$414.4M
$20.8M
$435.2M
Note that actual cash generated by our other business in 2019 was $1.7M—an increase of $1.1M
over what the model would have predicted in 2018, because this segment grew more than
20% in 2019.
22
7
Table 17. Discretionary Cash Available For Acquisition Spend, Per Pet
Contribution profit over the
life of an average pet
Fixed expenses over the
life of an average pet
Total profit over the life of
the average pet*
PAC
Lead1 Convert2
2016
2017
2018
2019
$631
$727
$710
$753
$341
$318
$261
$230
$290
$409
$449
$523
$123
$152
$164
85%
75%
60%
$212
50%
15%
25%
40%
50%
1Please note that in our filings, we refer to this as our key metric called “LVP, including fixed
expenses.” We have titled this column to align with the row titled “Profit Per Pet Per Month” in
Table 11 of this letter.
2Historically, we have not tracked the attribution between our lead and conversion costs.
Therefore, the percentages in Table 17 are internal management estimates.
23
Table 18. Discounted Cash Flow Model Inputs 1.3
Monthly cash generated
from The Average
subscription pet
Total Pet
Months
Total cash
generated
subscription
pets
Total cash
generated
other pets
Total cash
generated
Acquisition spend
minus sign up fee
Cash after
acquisition
spend
2018 Actual
$5.74
4,843,802
$27.8M
$0.5M
$28.3M
$21.1M
$7.2M
2019 Projected
2019 Actual
$7.02
5,602,431
$6.85
5,575,670
$39.3M
$38.2M
$0.6M
$1.7M
$39.9M
$39.9M
$30.4M
$30.4M
$9.5M
$9.5M
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
$7.78
6,407,329
$49.9M
$1.6M
$51.5M
$38.4M
$13.1M
$8.47
7,280,343
$61.7M
$2.3M
$64.0M
$46.7M
$17.3M
$9.18
8,242,219
$75.6M
$3.1M
$78.7M
$56.5M
$22.2M
$9.81
9,304,305
$91.3M
$4.0M
$95.3M
$67.4M
$27.9M
$10.32
10,479,007
$108.1M
$4.8M
$112.9M
$79.1M
$33.8M
$10.84
11,781,547
$127.9M
$5.7M
$133.6M
$93.0M
$40.6M
$11.43
13,230,666
$151.2M
$6.9M
$158.1M
$109.5M
$48.6M
$12.04
14,850,112
$178.8M
$8.2M
$187.0M
$129.3M
$57.7M
$12.68
16,667,751
$211.4M
$9.9M
$221.3M
$153.0M
$68.3M
$13.37
18,707,901
$250.1M
$11.8M
$261.9M
$180.9M
$81.0M
$14.09
20,997,766
$295.9M
$14.3M
$310.2M
$214.2M
$96.0M
$14.86
23,567,914
$350.1M
$17.2M
$367.3M
$253.4M
$113.9M
$15.67
26,452,650
$414.4M
$20.8M
$435.2M
$300.0M
$135.2M
24
8
25
Table 19. Discounted Cash Flow Model Inputs 1.4
Monthly cash generated from the
average subscription pet
Total Pet Months
Total cash generated
subscription pets
Total cash
generated
other pets
Total cash
generated
2019 Actual
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
Terminal year
$6.85
$7.78
$8.47
$9.18
$9.81
$10.32
$10.86
$11.43
$12.04
$12.68
$13.37
$14.09
$14.86
$15.67
$16.51
5,575,670
6,407,329
7,280,343
8,242,219
9,304,305
10,479,007
11,781,547
13,230,666
14,850,112
16,667,751
18,707,901
20,997,766
23,567,914
26,452,650
27,978,852
$38.2M
$1.7M
$39.9M
$49.9M
$1.6M
$51.5M
$61.7M
$2.3M
$64.0M
$75.6M
$3.1M
$78.7M
$91.3M
$4.0M
$95.3M
$108.1M
$4.8M
$112.9M
$127.9M
$5.7M
$133.6M
$151.2M
$6.9M
$158.1M
$178.8M
$8.2M
$187.0M
$211.4M
$9.9M
$221.3M
$250.1M
$11.8M
$261.9M
$295.9M
$14.3M
$310.2M
$350.1M
$17.2M
$367.3M
$414.4M
$20.8M
$435.2M
$461.8M
$23.9M
$485.7M
Table 20. Terminal Year Cash After PAC Spend
New enrollments,
terminal year
PAC
Terminal year cash generated
$485.7M*
Refer-a-friend & add-a-pet
acquisition spend
New pet acquisition spend
Net profit in terminal year
195,852
151,411
($310)
($60.7M)
($620)
($93.9M)
$331.3M
*Excludes sign-up fees.
26
Table 21. Discounted Cash Flow Model Inputs 1.5
Monthly Cash Generated
From The Average
Subscription Pet
Total Pet Months
Total Cash Generated
Subscription Pets
Other
Pets
Total Cash
Generated
PAC spend minus
sign up fee
Cash after
PAC spend
2019 Actual
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
Terminal
Year
$6.85
$7.78
$8.47
$9.18
$9.81
5,575,670
6,407,329
7,280,343
8,242,219
9,304,305
$38.2M
$1.7M
$39.9M
$30.4M
$9.5M
$49.9M
$1.6M
$51.5M
$38.4M
$13.1M
$61.7M
$2.3M
$64.0M
$46.7M
$17.3M
$75.6M
$3.1M
$78.7M
$56.5M
$22.2M
$91.3M
$4.0M
$95.3M
$67.4M
$27.9M
$10.32
10,479,007
$108.1M
$4.8M
$112.9M
$79.1M
$33.8M
$10.86
11,781,547
$127.9M
$5.7M
$133.6M
$93.0M
$40.6M
$11.43
13,230,666
$151.2M
$6.9M
$158.1M
$109.5M
$48.6M
$12.04
14,850,112
$178.8M
$8.2M
$187.0M
$129.3M
$57.7M
$12.68
16,667,751
$211.4M
$9.9M
$221.3M
$153.0M
$68.3M
$13.37
18,707,901
$250.1M $11.8M
$261.9M
$180.9M
$81.0M
$14.09
20,997,766
$295.9M $14.3M
$310.2M
$214.2M
$96.0M
$14.86
23,567,914
$350.1M $17.2M
$367.3M
$253.4M
$113.9M
$15.67
26,452,650
$414.4M $20.8M
$435.2M
$300.0M
$135.2M
$16.51
27,978,852
$461.8M $23.9M
$485.7M
$154.4M
$331.3M
Table 22. Terminal Year P&L
Subscription revenue
$3,393M
Other revenue
$874M
Total revenue
$4,267M
100%
Cash earned after capital charge
$486M
- PAC
($154M)
=Net profit before taxes
$331M
11%
4%
8%
27
Table 23. Valuation Sensitivity Analysis
Discount rate
9.8%
10.8%
11.8%
Terminal
growth rate
4.5%
$1.56B
$1.20B
$0.96B
5.0%
$1.69B
$1.29B
$1.01B
5.5%
$1.86B
$1.38B
$1.07B
END NOTES
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, acquisition cost, and free cash flow. 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
GA AP. Trupanion urges its investors to review the reconciliation of its non- GA AP 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 on
Trupanion’s Investor Relations website.
Our internal rate of return is calculated assuming the new pets we enroll during the year will
behave like an average pet. Specifically, our 2019 calculation assumes adjusted operating
income (calculated as the average monthly revenue for new pets of $57.52 factored by the
adjusted operating margin of 11.5%) for an average subscriber life of 70.4 months (calculated as
the quotient obtained by dividing one by the churn rate, which equals one minus the average
monthly retention rate of 98.58%).
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.
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, new pets enrolled, retention and churn, active hospitals, international expansion, veterinary
invoices, and variable and fixed expenses) our business strategy and plans and our objectives
for future operations. In particular, this letter extensively discusses our internal discounted cash
flow model, and you should regard substantially all parts of this discussion as for ward-looking
statements. In addition, the are for ward-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 risks relating to:
• our net losses since inception, our ability to maintain revenue growth, maintain profitability,
obtain returns on our investments in pet acquisition, and other financial risks;
• our ability to attract online visitors, grow or member base, and maintain retention rates;
• our ability to maintain relationships with Territory Partners, veterinarians and strategic partners;
• our ability to remain competitive and maintain brand recognition;
• our ability to scale our infrastructure, manage our growth, budget for veterinar y invoice
expenses, and other business risks;
• our other business;
• security breaches, payment processing, and related technology and intellectual property
matters;
• compliance with risk-based capital and other regulations;
• litigation or regulatory proceedings;
• dependence on key personnel;
• compliance with covenants in our credit agreement;
• international operations, including exchange rates;
• investments or acquisitions, owning an office building, and other strategic matters;
• tax, accounting and general economic matters;
• being a public company; and
• ownership of our common stock; and
• 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 make. In light of these risks, uncertainties and assumptions, the for ward-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 fo r wa rd - look ing statements as predictions o r gua rantees of futu re
events. Although we believe that the assumptions and expectations reflected in the for ward-
looking statements are reasonable based on our historical experience, these assumptions and
expectations involve significant judgment and uncertainty, and in some cases these assumptions
and expectations (and therefore the judgment and uncertainty) have been projected over an
extended period of time. Future results, levels of activity, performance or events and circumstances
reflected in the for ward-looking statements may not be achieved or occur. We undertake no
obligation to update publicly any forward-looking statements for any reason, except as required
by law.
THIS PAGE LEFT INTENTIONALLY BLANK 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, 2019
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
Trading Symbol
TRUP
Name of Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None.
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
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 every Interactive Data File required to be submitted 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 such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
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, 2019, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $1,174,944,132 using the closing price on that day of $36.13.
As of February 6, 2020, there were approximately 34,958,851 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 2019 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, 2019.
TRUPANION, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2019
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
Parent Company Financials
Page
3
9
30
30
30
30
31
33
35
50
51
81
81
83
84
84
84
84
84
85
87
88
90
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.
Company 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
the life of their pets, priced specifically for each pet’s unique characteristics.
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 by writing policies on behalf of third parties. We do not undertake the marketing efforts for these policies but
have a business-to-business relationship with these third parties. Our other business segment also includes revenue from
companies or organizations who choose to offer medical insurance for cats and dogs as a benefit to their employees or
members. The products in our other business segment may be materially different from our subscription business. For the years
ended December 31, 2019, 2018, and 2017 we generated 83.7%, 86.8%, and 90.0% of our revenue through subscription fees
for our medical insurance for cats and dogs, and 16.3%, 13.2% and 10.0% of our revenue through our other business segment.
Our Business
It is very difficult for pet owners to budget for veterinary expenses when their pets become sick or injured. Pet owners do not
know whether their pet’s health will be “average,” “lucky,” or “unlucky.” Over the life of a pet, veterinary expense for a lucky
vs. unlucky pet can vary from $500 to more than $50,000. Even if a pet ends up being “average” over its life, the timing of
accidents or illnesses may not align with the owner’s budgeting approach. Further, many pet owners do not know how to
budget for the “average” cost of medical care for their pets. Average veterinary expenses often greatly exceed the expectations
of the pet owner and vary dramatically based on a multitude of factors, including the availability of care by region and the types
of treatments advisable for specific pet breeds. Consequently, self-insuring is not an effective solution for many individual pet
owners.
Our subscription plan was designed by veterinarians to enable them to recommend the optimal treatment for the pet, without
having their decisions dictated by the cost of treatment. As a result, we believe our subscription plan enables veterinarians to
establish stronger ties and better alignment with their clients. Our members tend to visit their veterinarian more frequently and
spend more money on the best course of treatment for their pet. This results in better health outcomes for pets, which we
believe creates a flywheel effect that has been the key driver of growth for our subscription business.
Our subscription business’s cost-plus model is designed to spread the risk evenly within each category of pets so our members
can budget for unexpected veterinary costs. We have been collecting comprehensive pet health data for approximately 20 years.
We believe our data and approach to pricing is unmatched and it provides us with a greater understanding of anticipated
veterinary costs. We leverage this to price our subscription plan for each pet based on their specific circumstances such as
breed, age (at enrollment), geography, and desired deductible so that, in aggregate, the amounts paid by owners of lucky pets
helps to cover the veterinary costs incurred by unlucky pets. We believe our actuarial team, working with our granular data, is
able to price our subscription plan much more accurately than any other player in the industry so that we can provide our
members with the highest value proposition.
In addition to pricing our subscription plan based on years of comprehensive pet health data, our subscription plan has been
designed to provide the highest target payout ratio available (what we spend paying veterinary invoices) and delivers the
broadest coverage available. Our plan pays 90% of eligible costs relating to any illnesses and injuries.
We also provide a differentiated customer experience to our members, including our proprietary, patented software that is
designed to communicate directly with a veterinary hospital’s practice management software. Invoices are often approved in
seconds so the participating veterinarian’s clients pay only their 10% portion of eligible veterinary invoice costs while we pay
the rest of the balance directly to the hospital. We believe this unique solution, which is offered free to veterinarians and pet
owners, transforms the insurance experience.
3
Due to our focus on providing a superior value proposition and member experience, our members have been extremely loyal.
Since 2010, we have a 98.5% average monthly retention rate. Our growing and loyal membership base provides us with highly
predictable and recurring revenue. We operate our subscription business segment similar to other subscription-based
businesses, with a focus on achieving a target margin prior to our pet acquisition expense and then maximizing the estimated
internal rate of return for an average pet on our pet acquisition expenses.
Our target market is large and under-penetrated. According to the Insurance Information Institute, there are 183.9 million
household dogs and cats in the United States, and according to the Canadian Animal Health Institute, there are 16.5 million in
Canada. North American Pet Health Insurance Association estimates that the penetration rate for medical insurance for cats and
dogs in North America is approximately one to two percent. We believe that over the long-term, the North American
penetration rate can reach levels comparable to the U.K., where, according to Global Market Insights, approximately one in
four cats and dogs has medical insurance.
Our total enrolled pets grew from 31,207 pets on January 1, 2010 to 646,728 pets on December 31, 2019, which represents a
compound annual growth rate of 35%. As a result, our revenue has grown from $19.1 million in 2010 to $383.9 million in
2019.
Total Revenue by New and Existing Pets Enrolled
(in millions)
Our Strategy
We are focused on attracting and retaining members by providing a best-in-class value and member experience. In particular,
we are focused on the following:
Increasing the number of veterinary hospitals as a source of leads. We intend to increase the number of veterinary hospitals
that are helping their clients learn about high quality medical insurance, primarily by leveraging our Territory Partners and by
increasing the number of veterinary hospitals using our software.
Increasing the number of leads per veterinary hospital. We intend to continue increasing the rate at which active veterinary
hospitals refer leads to us primarily by improving our relationships over time including through our Territory Partners, internal
hospital support team and software
Increasing the number of 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, including increasing
the percentage of claims that are processed rapidly at checkout and paid directly to veterinarians through our patented,
proprietary software.
4
Improving conversion. We are investing to increase the rate at which we convert pet owners receiving quotes for our
subscription plan into enrolled members.
Improving retention, particularly in the first 90 days of an enrollment. Member retention is a key part of our strategy.
Historically, members in their first 90 days of membership have the lowest retention rate. We are investing in the education
process and improving initial customer communication and experiences in order to increase our retention rates.
Automating the payment of veterinary invoices. We have developed algorithms to leverage the data from our software so we
can automate the payment of veterinary invoices. We intend to increase the percentage of veterinary invoices paid without
human intervention with the goal of ensuring that we can do so without reducing the quality of our decision making on a case-
by-case basis.
Exploring other member acquisition channels. We regularly evaluate new member acquisition channels. We intend to pursue
those new channels that we believe could, over time, deliver our desired return on investment.
Expanding internationally. While we are primarily focused on capturing the large opportunity in the U.S. and Canadian
markets, we recently entered the Australian market through a joint-venture, and we continue to explore other international
expansion opportunities.
Pursuing other revenue opportunities. We intend to continue to leverage our competitive advantages to generate revenue. For
example, within our other business segment, our wholly-owned insurance subsidiary, American Pet Insurance Company, has
partnered with unaffiliated general agents offering pet insurance products since 2012. In addition, we have been pursuing and
intend to continue to pursue opportunities to provide pet owners with complementary products and services. For example, we
have invested in a pet food initiative to explore whether pets on a calorie-controlled, high-quality diet have improved health
outcomes that can justify a decrease in the cost of their subscription plan.
Sales and Marketing
We believe that support from veterinarians is critical to driving broader acceptance of medical insurance for pets in North
America and our strategy is based on this belief. Since 2003, we have engaged “Territory Partners” charged with cultivating
relationships with veterinarians and building awareness among the veterinary community of the benefits that our subscription
plan offers both veterinarians and their clients. Our Territory Partners are independent contractors who market our product and
are paid fees based on activity in their regions. Their role is to create meaningful, long-term relationships with veterinarians and
to educate those veterinarians about the benefits of high-quality medical insurance for the veterinarians’ base of clients. We
believe this structure aligns our interests and provides a platform that we can leverage over time.
Our Territory Partner approach is unique and unmatched in our industry. We believe that it would be extremely difficult, costly
and time consuming for a competitor to replicate.
We generate leads through a diverse set of member acquisition channels, which we then convert into members primarily
through our contact center, website and other direct-to-consumer activities. These channels primarily include leads from third-
parties such as veterinarians and referrals from existing members.
Competition
We compete primarily with credit card companies, which enable pet owners to self-fund veterinary costs on an emergency
basis, as well as new and existing pet insurance brands. The vast majority of pet owners in the United States and Canada do not
currently have medical insurance for their pets and there is very little movement from one insurance company to another due to
pre-existing conditions. As a result, we are focused primarily on expanding the overall size of the market by providing pet
owners with the highest value proposition and the broadest coverage. We view our primary competitive challenge as educating
pet owners on why Trupanion is a better alternative to self-insuring.
We have been competing against at least 20 brands at any one time in our operating history. In our experience, competing pet
insurance companies generally fall into one of two segments: (a) traditional providers with low target price points and narrow
coverage that is unlikely to cover things like congenital and hereditary conditions, and (b) higher-value providers that provide
some form of an annual plan designed to increase the cost of the plan as the pet ages.
We believe that we have competitive advantages that position us favorably. These include: broader coverage and a superior
value proposition due, in part, to our vertically integrated structure that reduces frictional costs, a unique member acquisition
strategy that leverages the relationships our Territory Partners have developed in the veterinary community, a proprietary
database containing 20 years of comprehensive pet health data enabling us to be more precise in our pricing and pet acquisition
expense, and our patented, proprietary software which allows us to pay veterinary invoices directly at time of treatment.
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 and, in some cases, exclusive
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 hold two U.S. utility patents and one U.S. design patent
related to our proprietary software, and we have multiple additional patent applications pending in the United States and in
other jurisdictions. 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 our failure to do so may adversely impact our
business.
Employees
Our company culture and team is critical to our continued success. 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. As of
December 31, 2019, we had 738 employees.
Regulation
United States Regulations
U.S. federal law and the laws and regulations of each United States state, territory and possession apply to companies licensed
to transact insurance business in these jurisdictions. While our insurance subsidiary and underwriter, 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 also currently licensed to do business in all 50 states, Puerto Rico and the District of
Columbia. As such, APIC is also subject to comprehensive regulation and supervision under laws and regulations of each U.S.
state, territory, and possession.
Because APIC is domiciled in New York, APIC is subject to laws governing insurance holding companies in New York. These
laws, among other things, require that we file periodic information reports with the NY DFS, including information concerning
our capital structure, ownership, financial condition and general business operations; limit our ability to enter into transactions
between APIC and our other affiliated entities; restrict the ability of any one person to acquire certain levels of our voting
securities without prior regulatory approval; and restrict APIC’s ability to pay dividends to its holding company parent.
Other state 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. Regulators may perform
market conduct examinations by visiting our facilities for a period of time to identify potential regulatory violations, discuss
and correct identified violations, or to obtain a better understanding of how we operate in the marketplace. Further, U.S. state
insurance laws and regulations require APIC to file financial statements with state insurance regulators in each state where it is
licensed and its operations and accounts are subject to examination at any time. 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. When 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 state of domicile. The financial statements included in this document are prepared in
accordance with U.S. generally accepted accounting principles. The values for assets, liabilities and equity reflected in these
financial statements are usually different from those reflected in financial statements prepared under SAP.
U.S. federal law generally does not directly regulate the insurance industry. However, from time to time, various federal
regulatory and legislative changes have been proposed. 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.
6
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 was charged with
monitoring all aspects of the insurance industry (with exceptions for certain types of 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.
Industry Regulations
The NAIC adopted risk-based capital requirements for life, health and property and casualty insurance companies. APIC is
subject to these risk-based capital requirements that require us to maintain certain levels of surplus $55.3 million as of
December 31, 2019 to support our overall business operations in consideration of our size and risk profile. If we fail to
maintain the amount of risk-based capital required, we will be subject to additional regulatory oversight. To comply with these
regulations, we may be required to maintain capital that we would otherwise invest in our growth and operations. Refer to Item
1A. “Risk Factors” for additional details of these requirements.
Further, NAIC 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. As of December 31, 2019,
APIC had three IRIS ratios outside the usual range, relating to net premiums written to surplus, change in policyholders’
surplus, and investment yield. While a ratio outside the usual range is not considered a failing result, regulators may investigate
or monitor an insurance company if its IRIS ratios fall outside the prescribed usual range.
Other Jurisdictions Regulations
In Canada, our insurance is written by an unaffiliated Canadian-licensed insurer, Omega General Insurance Company (Omega).
Under the terms of our agreements with Omega, we retain any financial risk associated with our Canadian business. Omega’s
Canadian insurance operations are supervised and regulated by Canadian federal, provincial and territorial governments and
Omega is a fully licensed insurer in all of the Canadian provinces and territories in which we do business. In addition, we are
required to fund a Canadian trust account in accordance with Canadian regulations. As of December 31, 2019, the account held
CAD $4.3 million.
We have a segregated cell business called Wyndham Segregated Account AX (WICL), located in Bermuda. WICL is regulated
by the Bermuda Monetary Authority (BMA). Insurance companies with a presence in Bermuda are subject to 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. In addition, BMA has the authority to supervise and, in
certain circumstances, investigate and intervene in the affairs of insurance companies. Most significantly, Bermudan law
restricts WICL’s ability to declare or pay dividends and the value of WICL’s assets must remain greater than the aggregate of its
liabilities, issued share capital, and share premium accounts.
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.
7
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. 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.
8
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 cumulative net losses since our inception and may not be able to maintain profitability in the
future.
We have incurred significant cumulative net losses since our inception. We incurred net losses of $1.8 million and $0.9 million
in the years ended December 31, 2019 and 2018, respectively, and as of December 31, 2019, we had an accumulated deficit of
$85.5 million. We have funded our operations through equity financings, borrowings under a revolving line of credit and term
loans and, since 2016, positive cash flows from operations. Our ability to maintain profitability will depend in significant part
on our obtaining new members, retaining our existing members and ensuring that our expenses, including our sales and
marketing expenses, does not exceed our revenue. We expect to make significant expenditures and investments in member
acquisition. Our recent growth in revenue and membership may not be sustainable or may decrease, and we may not generate
sufficient revenue to maintain profitability. Additionally, we budget for our expenses 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 estimates. Accordingly, any significant shortfall of revenue in relation to our
estimates could have an immediate negative effect on our financial results.
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:
•
improve our market penetration through cost-efficient and effective sales and marketing programs to attract new
members;
convert leads into enrollments;
increase the lifetime value per pet;
•
• maintain high retention rates;
•
• maintain positive relationships with veterinarians and other lead sources;
• maintain positive relationships with and increase the number and efficiency of Territory Partners;
•
•
continue to offer a superior value with competitive features and rates;
price our subscriptions in relation to actual operating expenses and achieve required regulatory approval for pricing
changes;
recruit, integrate and retain skilled, qualified and experienced sales department professionals who can demonstrate our
value proposition to new and existing members;
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 efficiently review veterinary
invoices and process payments;
generate new and maintain existing relationships and programs in our other business segment;
react to existing and new competitors;
increase awareness of and positive associations with our brand; and
successfully respond to and comply with regulations affecting our business and defend or prosecute any litigation.
•
•
•
•
•
•
You should not rely on our historical rate of revenue growth as an indication of our future performance.
We base our decisions regarding member acquisition expenditures primarily on 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.
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We have made and plan to continue to make significant investments to grow our member base. We spent $33.3 million on sales
and marketing to acquire new members for the year ended December 31, 2019. Our average pet acquisition cost and the
number of new pets we enroll depends on a number of factors and assumptions, 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 increased over time and and has significantly varied in the past.
In the future, our average pet acquisition cost may continue to rise and 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.
In addition, we base our decisions regarding our member acquisition expenditures primarily on our internal rate of return
generated on an average pet. This analysis depends substantially on estimates and assumptions based on our historical
experience with pets enrolled in earlier periods, including our key operating metrics. If our estimates and assumptions
regarding our internal rate of return and the lifetime value of the pets that we project to acquire and our related decisions
regarding investments in member acquisition prove incorrect, or if our calculation of internal rate of return and 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.
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. We are aware that certain of our competitors have spent additional funds to promote their products in search results
over us. If we decide to respond by purchasing search advertising, our pet acquisition costs would increase and harm our
business, operating results and financial condition.
If we are unable to grow our member base and maintain high member retention rates, our growth prospects and revenue
will be adversely affected.
Our ability to grow our business depends on retaining and expanding our member base. For the year ended December 31, 2019,
we generated 83.7% of our revenue from subscriptions. In order to continue to increase our membership, we must continue to
convince prospective members of the benefits of pet insurance and existing members of the continuing value of our product.
We utilize Territory Partners, who are paid fees based on enrollments in their regions, to communicate the benefits of medical
insurance to veterinarians through in-person visits. Veterinarians then educate pet owners, who visit our website or call our
contact center to learn more about these benefits, and potentially become members. We also invest in other third-party and
direct to consumer member acquisition channels, though we have limited experience with some of them. We plan to expand the
number of our Territory Partners and other lead-generation sources and to engage in other marketing activities, including direct
to consumer advertising, which are likely to increase our acquisition costs.
We seek to convert consumers who visit our website and call our contact center into members. The rate at which we convert
these visitors 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:
•
•
•
•
•
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;
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 conversion;
system failures or interruptions in our website or contact center; and
changes in the mix of consumers who learn about us through various member acquisition channels.
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We have made and plan to continue to make substantial investments in features and functionality for our website and training
and staffing for our contact center that are designed to generate traffic, increase member engagement and improve 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.
We have historically experienced high average monthly retention rates. For example, our average monthly retention rate
between 2010 and 2019 was 98.5%. We expect to continue to make significant expenditures relating to the retention of existing
members, including an increase in the number of inside account managers and development and implementation of new
technology platforms designed to encourage retention of these members.
If we do not retain our existing members or if our marketing initiatives do not result in enrolling more pets or result in enrolling
pets that inherently have a lower retention rate, we may not be able to maintain our retention and new member acquisition rates.
Members we obtain through aggressive promotions or other channels that involve relatively less meaningful contact between us
and the member are 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.
We rely significantly on Territory Partners, veterinarians and other third parties, including strategic partners, to generate
leads.
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, existing members, online and other businesses, animal
shelters, breeders and veterinary affiliates, including veterinarian purchasing groups and associations 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 as we grow.
Veterinary leads represent our largest member acquisition channel. We spend significant time and resources attracting qualified
Territory Partners and providing them with current information about our business and they, in turn, communicate the benefits
of medical insurance for pets to veterinarians. Our relationship with our Territory Partners may be terminated at any time (for
instance, if they feel unsupported or undervalued by us), 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 affect 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
or need to in order to implement our business strategy and our growth and financial performance could be adversely affected.
Our ability to generate leads through veterinary hospitals could be negatively impacted if our policy is perceived to be
inadequate, unreliable, cumbersome or otherwise does not provide sufficient value, or if our process for paying veterinary
invoices is unsatisfactory to the veterinarians’ clients.
If we fail to establish or 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 exam day offer 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.
11
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. In addition, the costs associated with defending, settling,
or resolving pending and future lawsuits (including demands for arbitration) relating to the independent contractor status of
Territory Partners could be material to our business.
Any of the foregoing circumstances could have a material adverse impact on our operating results and financial condition.
The prices of our subscriptions are based on assumptions and estimates. 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 approval
for our pricing, our revenue and financial condition could be adversely affected.
The pricing of our subscriptions reflects amounts we expect to pay for a pet’s medical care and we derive these prices from
assumptions that we make based on our analytics platform. Our analytics platform draws upon pet data we collect and we use
this data to price our policy in response to 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 hospital preferences. 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.
The prices of our subscriptions also reflect assumptions and estimates regarding our own operating costs and expenses. We
monitor and manage our pricing and overall sales mix to achieve our target returns. If the actual costs, including veterinary
invoice expenses, operating costs and expenses within anticipated pricing allowances, are greater than our assumptions and
estimates such that the premiums we collect are insufficient to cover these expenses, then our gross profit could be adversely
affected and our revenue may be insufficient to maintain profitability. Conversely, if our pricing assumptions differ from actual
results such that we overprice risks, our competitiveness and growth prospects could be adversely affected.
In addition, many states 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 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.
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 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, setting 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.
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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 (at enrollment) 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.
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 and resources available for acquiring additional members.
As more veterinary hospitals install and use our patented proprietary software, the number or amounts of veterinary
invoices we receive is likely to increase.
Our patented proprietary software is designed to integrate directly with most software systems used by veterinary hospitals and
allow us to receive and pay veterinarian invoices directly. We believe that it is critical to our long-term success to improve the
member experience so we encourage veterinary hospitals to install and use our software. We have found that installation and
use of our software by a veterinary hospital could increase the number of invoices we receive from that practice. As more
veterinary hospitals install our software, we expect the number or amounts of veterinary invoices to increase and result in an
increase in our cost of revenue and this may have a material adverse effect on our financial condition.
Our use of capital may be constrained by risk-based capital regulations or contractual obligations.
Our subsidiary, APIC, 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 $55.3 million as of
December 31, 2019. We are also subject to a contractual obligation related to our reinsurance agreement with Omega, who
writes our policies in Canada. Under this agreement, we are required to fund a Canadian trust account in accordance with
Canadian regulations. As of December 31, 2019, the account held CAD $4.3 million.
To comply with these regulations and 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.
Our success depends on our ability to review, process, and pay veterinary invoices timely and accurately.
We believe member satisfaction depends on our ability to accurately evaluate and pay veterinary invoices in a timely manner.
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, effectiveness of management, our ability to
develop or select and implement appropriate procedures, supporting technologies and systems, changes in our policy and
veterinarian compliance with our protocols and procedures. Our failure to 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.
We may not identify fraudulent or improperly inflated veterinary invoices.
It is possible that a member, or a third-party 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.
13
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, such as wellness. In addition, new entrants backed by large insurance
companies, such as Marsh, Nationwide, and Geico, 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 offers that are more attractive to potential employees, referral sources and third-party service providers.
To compete effectively, we believe 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, which could adversely affect our pricing, lower our revenue, prevent us from maintaining profitability and diminish
our brand strength.
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 others, and to our ability to attract new members, new Territory Partners, and
additional supportive veterinarians. 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;
the quality of service provided, including the fairness, ease and timeliness of reviewing and paying veterinary
invoices;
actions of our competitors, Territory Partners, veterinarians and others;
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 will 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. For instance, we have
found that search engine optimization costs have increased as competitors have spent additional funds to promote their products
in search results over us. 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 could be
adversely affected, 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.
14
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, billing 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 for those veterinary hospitals who have installed our
patented proprietary software, we receive and pay veterinarian invoices directly through our software. 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. Further, our development and implementation activities may
not be successful, may not be well-received by veterinarians or by new or existing members, particularly if they are costly,
cumbersome or unreliable, and we may incur delays or cost overruns or elect to curtail our currently planned expenditures
related to them. Even if our system improvements are well-received, they may be or become obsolete due to technological
reasons or the availability of alternative solutions in the marketplace. If new solutions and enhancements are not successful on
a long-term basis, we may not realize benefits from these investments, and our business and financial condition could be
adversely affected.
In addition, 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.
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 and this commitment may
also result in increased costs (such as member acquisition costs or costs associated with increases in the number or amounts of
veterinary invoices received) generated by our business, which could prevent us from remaining profitable and could impair
our ability to compete effectively for business. 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 and
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. If we do not successfully implement
improvements in these areas, our business, operating results and financial condition will be harmed.
15
Emerging claim and coverage issues may adversely affect our business.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues
related to claims and coverage may emerge, including new or expanded theories of liability. These or other changes could
impose new financial obligations on us by extending coverage beyond our underwriting intent or otherwise require us to make
unplanned modifications to the products and services that we provide, or cause the delay or cancellation of products and
services that we provide. In some instances, these changes may not become apparent until sometime after we have issued
subscriptions that are affected by the changes. As a result, the full extent of liability under our subscriptions may not be known
for many years after subscription begins.
Our operating results may vary, which could 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 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.
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 have
experienced 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.
Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could
adversely affect our ability to compete effectively and harm our results of operations.
Our industry is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or be
acquired. In addition, some of our competitors may enter into new alliances with each other or may establish or strengthen
cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation,
acquisition, alliance or cooperative relationship could adversely affect our ability to compete effectively and lead to pricing
pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and
other resources, all of which could harm our business, financial condition, cash flows and results of operations.
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. We would be adversely affected if we fail to
adequately plan for the succession of our senior management and other key employees. 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. 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.
16
We have and may continue to create, invest in or acquire businesses, products and technologies, which could divert our
management’s attention, result in additional dilution to our stockholders, otherwise disrupt our operations or harm our
operating results.
We have and may continue to create, invest in or acquire complementary businesses, products, technologies and new lines of
business. Our ability to successfully evaluate and manage investment opportunities, or make and integrate acquisitions or
products, is unproven. For example, we have invested in a pet food initiative, and we believe that pet food may be an important
part of our offerings over the long term. We do not have experience manufacturing, selling, or distributing food products and
pet food manufacturing facilities and pet food products are subject to many laws and regulations administered by the United
States Department of Agriculture, the Federal Food and Drug Administration, the Occupational Safety and Health
Administration, and other federal, state, local, and foreign governmental agencies relating to the production, packaging,
labelling, storage, distribution, quality, and safety of food products and the health and safety of employees.
The pursuit of potential new products, investments or acquisitions may divert the attention of management and cause us to
incur various expenses in identifying, investigating and pursuing suitable opportunities, whether or not they are consummated.
Further, even if we successfully invest in or acquire additional businesses or technologies, we may not achieve the anticipated
benefits from the transaction. The investment or acquisition may also expose us to additional risks, including from
unknowingly inheriting liabilities that are not adequately covered by indemnities. Acquisitions or investments could also result
in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results.
If we do not spend our development budget efficiently or effectively on commercially successful and innovative offerings and
products, we may not realize the expected benefits of our strategy. Further, our development efforts with respect to new
products and offerings could distract management from current operations, and will divert capital and other resources from our
more established products and offerings. If an investment or acquisition fails to meet our expectations, our business, operating
results and financial condition may suffer.
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 revenue is attributable to a variety of different types of strategic partnership arrangements. These partnerships
involve various risks, depending on their structure, including the following:
our strategic partners may not be successful in creating leads;
• we may be unable to maintain or secure favorable relationships with strategic partners;
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• 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;
our strategic partners may acquire or form alliances with our competitors, thereby reducing their business with us;
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• 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.
Any inability to secure, maintain or effectively manage these complicated relationships with strategic partners could have a
material adverse effect on our revenue and operating results.
Our business and financial condition is subject to risks related to our writing of policies unaffiliated third parties.
Our other business segment includes revenues and expenses involving contractual relationships with unaffiliated third parties
and related 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 and 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, the pet insurance policies we write for general agents are subject to materially different terms and conditions than
our subscription. They are typically annual policies with monthly payment terms, which can result in accounts receivable
balances and payment timing patterns we do not experience in our subscription business. The relationships with these general
agents may 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 revenue with different general agents. For the year ended December 31, 2019,
premiums from policies sourced by general agents accounted for 14% of our total revenue, and one general agent sourced
members whose premiums accounted for over 10% of our total revenue. Further, the unaffiliated general agents administer
these policies and market them to consumers. If the general agents make operating decisions that adversely affect its business
or brand, our business or brand could also be adversely affected.
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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 pet insurance subscription 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. 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 Canadian members, or suspend member enrollment and renewals in Canada until we enter into a relationship
with another third party to write our subscription or we set up an entity able to perform this service, 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.
Changes in the foreign exchange rates may adversely affect our revenue and operating results.
We offer our subscription in Canada and in the future may offer it in other countries, which exposes us to the risk of changes in
currency exchange rates. For the year ended December 31, 2019, approximately 18% of our total revenue was generated in
Canada. Fluctuations in the relative strength of the US dollar has in the past and could in the future adversely affect our revenue
and operating results.
We may decide to set up multiple insurance subsidiaries, which may complicate our business and harm our results of
operations.
Currently, APIC, our wholly owned subsidiary, underwrites memberships for our U.S. subscription product, and Omega, a third
party, underwrites memberships for our Canadian subscription product. We are in the process of setting up additional wholly
owned insurance companies in the U.S. and Canada to underwrite our subscription and in the future we may decide to set up
and operate additional wholly-owned insurance companies in the U.S., Canada or a different country. The pursuit of acquiring
or forming a new insurance subsidiary may divert the attention of management and cause us to incur various expenses in
identifying, investigating and pursuing suitable opportunities, whether or not the formation or acquisition is completed. Further,
even if we are successful in forming or acquiring a new insurance subsidiary we may not achieve the anticipated benefits. In
addition, we may require additional capital to meet our risk-based capital requirements for the new insurance subsidiaries and
will be subject to additional regulatory scrutiny in the jurisdiction of incorporation and any additional jurisdictions the
insurance subsidiary operates. Failure to comply with laws, regulations and guidelines applicable to a new insurance subsidiary
could result in significant liability, result in the loss of revenue and otherwise harm our business, 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.
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.
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.
18
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.
We also 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. 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. 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. In the event of a loss of our systems or data, we could experience increased costs, delays, legal liability
and reputational harm, 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 store and/or transmit our members’ confidential information, including credit card
and bank account numbers and other private information. Because the methods used to obtain unauthorized access to private
information change frequently and may be difficult to detect for long periods of time, security breaches would expose us to a
risk of loss of this information, litigation and possible liability. Our payment services are similarly 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.
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.
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.
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.
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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. Although we are currently
compliant with PCI DSS, in the past we were 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 with the PCI DSS 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 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 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.
We have limited experience owning an office building and may face unexpected costs.
In August 2018, we purchased our home office building. Prior to this purchase, we had no experience owning an office
building. It is difficult to predict all costs associated with maintaining the building and ensuring it is suitable for our use and
that of other tenants and maintain compliance with all environmental and other regulations applicable to ownership of real
estate. It is possible that the other current tenants in the building may cease to rent space in the building, which would decrease
rental income we expect to receive from them. We recently learned that one tenant has decided not to continue leasing space in
the building and we are evaluating use of the newly vacant space. Tenants may also negotiate tenant improvements, requiring
capital expenditures that may adversely impact our financial position. In addition, we may identify structural defects or other
conditions, or we may determine that remodeling or renovations are necessary given our business operations and objectives.
Managing tenants, maintaining the building, and otherwise facing the costs and responsibilities of being the owner of a building
may be a distraction from our core business and cause our performance to suffer.
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, patents, copyrights, trademarks and domain
names, as well as contractual restrictions, to establish and protect our patented proprietary software and 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 proprietary software is protected by patents. These patents may not be sufficient to maintain effective product exclusivity
because patent rights are limited in time and do not always provide effective protection. Furthermore, our efforts to enforce or
protect our patent rights may be ineffective, could result in substantial costs and diversion of resources, could result in the
invalidation of our patent rights, and could substantially harm our operating results. Even where our patents rights are enforced,
legal remedies available for harm caused to us by infringing products may be inadequate to make us whole. Further, our
successful assertion of our patent against one competing product is not necessarily predictive of our future success or failure in
asserting the same patent against a second competing product. In addition, patents have a limited lifespan. In the United States,
the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available. However, the life of
a patent, and the protection it affords, is limited. Once the patent life has expired for our software, our competitors will be able
to use our patented technology.
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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 or license 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,
license 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 or technologies 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 and/or hosted by third parties in developing and operating our
technology platform and operating our business. From time to time, we may be required to renegotiate with these third parties
or negotiate with other third parties to include or continue using their intellectual property or technology in our existing
technology platform or business operations or in modifications or enhancements to our technology platform or business
operations. We may not be able to obtain the necessary rights from these third parties on commercially reasonable terms, or at
all, and the third-party intellectual property and technology we use or desire to use may not be appropriately supported,
maintained or enhanced by the third parties. If we are unable to obtain the rights necessary to use or continue to use third-party
intellectual property and technology in our operations, or if those third parties are unable to support, maintain and enhance their
intellectual property and technology, we could experience increased costs or delays, which in turn may harm our financial
condition, damage our brand and result in the loss of members.
Our technology platform and our data are also hosted by a third-party service provider. The terms under which such third-party
service provider provides us services may change and we may be required to renegotiate with that third party. If we are unable
to renegotiate satisfactory terms, we may not be able to transition to an alternative service provider without interrupting the
availability of our technology platform and any interruption could materially and adversely affect our business. Additionally, if
our third-party service provider experiences any disruptions, outages or catastrophes, or if it ceases to conduct business for any
reason, we could experience an interruption in our business, which in turn may damage our brand, result in a loss of members
and harm our financial condition.
The outcome of litigation or regulatory proceedings could subject us to significant monetary damages, restrict our ability to
conduct our business, harm our reputation and otherwise negatively impact our business.
From time to time, we have been, and in the future may become, subject to litigation, claims and regulatory proceedings and
inquiries, including market conduct examinations and 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.
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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, which may
have a material adverse effect on our business, operating results, financial condition and prospects. More critically, an adverse
result from a proceeding could require us to change the way we conduct our business, including our marketing and promotional
practices, and such a result may have a greater adverse effect on our business than monetary damages or fines. 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, merge with or acquire other entities, incur other indebtedness, make investments, and engage in
transactions with our affiliates. Our credit agreement also contains certain financial covenants. Our ability to meet these
restrictive covenants can be affected by events beyond our control. 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, 2019, we had $26.2 million outstanding indebtedness under our revolving line of credit and 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
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.
If our business does not generate sufficient cash flow from operating activities or if future borrowings, under our revolving
credit facility or otherwise, are not available to us 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.
We may have additional tax liabilities.
We are subject to income tax, premium tax, transaction tax and other taxes in the U.S. and foreign jurisdictions. Judgment is
required in determining our provision for income taxes, premium tax, transaction tax and other taxes. In the ordinary course of
our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Further, we often
make elections for tax purposes which may ultimately not be upheld. Although we believe our tax estimates are reasonable, the
final determination of tax audits and any related litigation in the jurisdictions where we are subject to taxation could be
materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a
material effect on our consolidated financial statements in the period or periods in which that determination is made.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2019, we had U.S. federal net operating loss carryforwards of approximately $130.3 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 taxes may be limited. In general, an
“ownership change” 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 by previous and
future ownership changes.
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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.
We are expanding our operations internationally, and we may therefore become subject to a number of risks associated with
international expansion and operations.
As part of our growth plan, we have explored, and expect to continue to explore, opportunities to expand our operations
internationally. For instance, we recently entered the Australian market through a joint venture and we may enter other
countries. We have no history of marketing, selling, administrating and supporting our subscription for consumers outside of
the United States, Canada, and Puerto Rico. In general, international sales and operations may be 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 currently;
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 between our patented proprietary software and software used by veterinarians;
difficulties in modifying our business model or subscription 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 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;
the uncertainty of protection for intellectual property rights in some countries; and
general economic and political conditions in these foreign markets.
These 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.
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 product are underwritten by APIC. APIC is an insurance company domiciled in the state
of New York and licensed by the New York Department of Financial Services (NY DFS). 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 (NAIC) 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, state insurance regulators will compare, on an annual basis as of December 31 or
more often as deemed necessary, an insurer’s total adjusted capital and surplus to assess an insurer’s capital adequacy. If an
insurer’s risk-based capital falls below a specific threshold, the regulator may take action, which can range from directing an
insurer to propose a plan to increase its capital to an acceptable level to placing the insurer under regulatory control.
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Applicable regulations regarding risk-based capital may change, and/or the NY DFS may increase APIC’s required levels of
risk-based capital in the future. Regardless, we anticipate that we will need to maintain greater amounts of risk-based capital if
our pet enrollment continues to grow. Additionally, a reduction in our risk-based capital may result in a 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.
Our business is heavily regulated, and if we fail to comply with the numerous applicable laws and regulations 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 federal, state, provincial and territorial governments in each jurisdiction in which we
operate. 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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grant and revoke licenses to transact insurance business;
conduct inquiries into the insurance-related activities and conduct of agents and agencies and others in the sales,
marketing and promotional channels;
require and regulate disclosure in connection with the sale and solicitation of insurance policies;
authorize how, by which personnel and under what circumstances insurance premiums can be quoted and published
and an insurance policy sold;
regulate how sales incentives may be structured;
regulate the content of insurance-related advertisements, including web pages, and other marketing practices;
approve policy forms, require specific benefits and benefit levels;
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.
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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. A regulator’s interpretation of existing laws or regulations
may change without notice. 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, because adverse regulatory actions in one jurisdiction must be reported to other jurisdictions, an adverse regulatory
action in one jurisdiction could result in penalties and adversely affect our license status or reputation in 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.
States may adopt new laws that may adversely affect our operating results and financial condition.
The NAIC may draft model laws that focus on medical insurance for pets. States may enact new laws to adopt what the NAIC
drafts, or a state may enact its own new laws or regulations that could affect our industry. Many states have and may continue
to consider proposed legislation that could significantly affect our operations, including, for example, our ability to effect rate
increases, to cancel or not issue existing policies, or how to market our product. Implementing changes in order to comply with
new laws or regulations could also be time-consuming and costly.
We may not receive approval for changes to an existing product, for a proposed new product, for pricing changes, or we
may not receive such approvals in a timely manner.
Most states require licensure and regulatory approval prior to marketing new insurance products or changing premiums for
existing products. From time to time, we seek to make updates to our existing subscription product. We may also introduce
new products that make changes that are more extensive to the product approved in a state. With respect to pricing, 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. A delayed approval may require 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.
We may be affected by mandatory participation in plans that could result in contributions from insurance subsidiaries we
own.
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 more broadly than we expect them to, which could require us to modify our
business practices, create liabilities, damage our reputation, and harm our business.
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Insurance regulations generally require that each individual who sells, solicits or negotiates insurance on our behalf must
maintain a valid license in the jurisdiction in which the activity occurs. Regulations also generally prohibit paying an insurance
commission to an unlicensed person or entity. Regulations 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 third parties were performing licensable activities without the required license, including for example a
veterinary hospital employee. 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. Regulators may
also deem payments we make to an unlicensed entity or person to be improper. 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.
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.
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. 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.
Law and regulations of the Internet, email and texting could adversely affect our business.
Many 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.
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Additionally, we use phone solicitation, email and texting to market our services to potential members and/or as a means of
communicating with our existing members. The laws and regulations governing the use of phone solicitation, email and texting
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 phone solicitation, text or electronic
communications with members could lead to significant damages. We have incurred, and will continue to incur, expenses in our
efforts 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 are 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 phone, text or 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.
Our segregated account in Bermuda, WICL segregated account AX, could be adversely impacted by regulatory compliance
of an unaffiliated 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.
Our accounting is becoming more complex, and relies upon estimates or judgments relating to our critical accounting
policies. If our accounting is erroneous or based on assumptions that change or prove to be incorrect, our operating results
could fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes, and also to comply with
many complex requirements and standards. We devote substantial resources to compliance with accounting requirements and
we base our estimates on our best judgment, historical experience, information derived from third parties, and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other
sources. However, various factors are causing our accounting to become complex, such as our recent building acquisition, our
investments in strategic opportunities and our test expansion into foreign markets. Ongoing evolution of our business may
compound these complexities. Our operating results may be adversely affected if we make accounting errors or our judgments
prove to be wrong, assumptions change or actual circumstances differ from those in our assumptions, which could cause our
operating results to fall below the expectations of securities analysts and investors or guidance we may have provided, resulting
in a decline in our stock price and potential legal claims. Significant judgments, assumptions and estimates used in preparing
our consolidated financial statements include those related to revenue recognition, stock-based compensation, business
combinations, and income taxes.
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.
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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.
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;
announcements of changes to our subscription, strategic alliances, acquisitions or significant agreements by us or by
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.
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.
28
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. Other than potential repurchases of 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.
29
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices are located at 6100 4th Avenue South, Seattle, Washington. We purchased the building in
August 2018 and occupy 91,437 square feet.
Item 3. Legal Proceedings
Information with respect to this item may be found in Note 8 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.
30
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”.
Dividend Policy
We have never declared or paid cash dividends on 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 6, 2020, there were 44 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 2020. See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.”
31
Stock Performance Graph
The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any
of our other filings under the Exchange Act or the Securities Act, except to the extent we specifically incorporate it by reference
into such filing.
This chart compares the stockholder return on an investment of $100 over the five years from December 31, 2014 through
December 31, 2019 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.
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
Trupanion Inc.
S&P Small Cap 600 Index
$
$
60.79
104.67
NASDAQ-100 Technology Sector Index $
108.80
Russell 2000 Index
$
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
$
$
$
$
223.33
127.24
170.27
117.10
$
$
$
$
322.46
153.78
250.03
144.51
32
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
Gain (loss) from investment in joint venture
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Year Ended December 31,
2019
2018
2017
2016
2015
(in thousands)
$
321,163
$
263,738
$
218,354
$
173,356
$
133,406
62,773
383,936
40,218
303,956
24,313
242,667
14,874
188,230
13,557
146,963
262,139
56,873
319,012
215,992
36,598
252,590
176,883
22,734
199,617
141,321
13,621
154,942
59,024
5,900
64,924
10,074
20,967
35,451
66,492
(352)
(1,920)
1,349
(1,629)
(1,640)
169
(1,809) $
47,746
3,620
51,366
9,248
18,164
24,999
52,411
41,471
1,579
43,050
9,768
16,820
19,104
45,692
32,035
1,253
33,288
9,534
15,205
15,247
39,986
—
(1,045)
1,198
(1,309)
(934)
(7)
(927) $
—
(2,642)
533
(1,244)
(1,931)
(428)
(1,503) $
—
(6,698)
218
(58)
(6,858)
38
(6,896) $
$
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)
(1) Includes stock-based compensation expense as follows:
Year Ended December 31,
2019
2018
2017
2016
2015
Cost of revenue
Technology and development
General and administrative
Sales and marketing
$
1,050
$
364
3,312
2,120
(in thousands)
$
927
209
2,304
1,335
$
594
216
1,887
722
$
275
246
1,893
532
Total stock-based compensation expense
$
6,846
$
4,775
$
3,419
$
2,946
$
263
404
1,889
446
3,002
33
Consolidated balance sheet data:
Cash and cash equivalents
Short-term investments
Working capital
Total assets
Current and long-term debt
Total liabilities
Common stock and additional paid-in capital
Accumulated deficit
Total stockholders' equity
Other operational data(1):
Total Business:
December 31,
2019
2018
2017
2016
2015
(in thousands)
$
29,168
$
26,552
$
25,706
$
23,637
$
69,732
67,196
257,200
26,086
120,440
232,731
(85,520)
136,760
54,559
54,773
37,590
40,692
207,510
105,859
12,862
78,337
219,838
(83,711)
129,173
9,324
57,425
134,511
(82,784)
48,434
29,570
34,729
82,345
4,767
37,630
129,574
(81,281)
44,715
17,956
25,288
30,016
70,917
—
25,561
122,844
(74,385)
45,356
Year Ended December 31,
2019
2018
2017
2016
2015
Total pets enrolled (at period end)
646,728
521,326
423,194
343,649
291,818
Subscription Business:
Total subscription pets enrolled
Monthly average revenue per pet
Lifetime value of a pet, including fixed expenses
Average pet acquisition cost (PAC)(2)
Average monthly retention
494,026
430,770
371,683
323,233
272,636
$
$
$
57.52
523
212
$
$
$
54.34
449
164
$
$
$
52.07
409
152
$
$
$
47.82
290
123
$
$
$
45.04
95
132
98.58%
98.60%
98.63%
98.60%
98.64%
(1) For more information about how we calculate total pets enrolled, total subscription pets enrolled, monthly average revenue per pet, lifetime value of a
pet, including fixed expenses, 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.”
34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion and analysis of our financial condition and results of operations together with our
consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K.
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and
2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K
can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7
of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
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 estimated internal rate of return of an average pet.
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 by writing policies on behalf of third parties. We do not undertake the marketing efforts for these policies and
have a business-to-business relationship with these third parties. Our other business segment also includes revenue from
companies or organizations that choose to offer medical insurance for cats and dogs as a benefit to their employees or members,
and contracts include multiple pets. The products 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 hospitals represent our largest referral
source. We engage our Territory Partners to have face-to-face visits with veterinarians and their staff. Territory Partners are
dedicated to cultivating direct veterinary relationships and building awareness of the benefits of high quality medical insurance
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 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 monitor average pet acquisition cost to
evaluate the efficiency of our sales and marketing programs in acquiring new members and measure effectiveness based on our
desired return on investment.
Key Operating Metrics
The following tables set forth our key operating metrics for the periods ended December 31, 2019, 2018 and 2017, and for each
of the last eight fiscal quarters.
Total Business:
Total pets enrolled (at period end)
Subscription Business:
Total subscription pets enrolled (at period end)
Monthly average revenue per pet
Lifetime value of a pet, including fixed expenses
Average pet acquisition cost (PAC)
Average monthly retention
35
Year Ended December 31,
2019
2018
2017
646,728
521,326
423,194
494,026
57.52
523
212
$
$
$
430,770
54.34
449
164
$
$
$
371,683
52.07
409
152
$
$
$
98.58%
98.60%
98.63%
Total Business:
Total pets enrolled (at
period end)
Subscription Business:
Total subscription pets
enrolled (at period end)
Monthly average revenue
per pet
Lifetime value of a pet,
including fixed expenses
Average pet acquisition
cost (PAC)
Average monthly
retention
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
Period Ended
646,728
613,694
577,686
548,002
521,326
497,942
472,480
446,533
494,026
479,427
461,314
445,148
430,770
416,527
401,033
385,640
$ 58.58
$ 58.12
$ 57.11
$ 56.13
$ 55.15
$ 54.55
$ 53.96
$ 53.62
$
$
523
222
$
$
511
208
$
$
482
213
$
$
471
205
$
$
449
186
$
$
435
155
$
$
431
150
$
$
419
165
98.58%
98.59%
98.57%
98.58%
98.60%
98.61%
98.64%
98.63%
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.
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.
Monthly average revenue per pet. Monthly average revenue per pet is calculated as amounts billed in a given period 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 subscription 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 subscription business.
Lifetime value of a pet, including fixed expenses. Lifetime value of a pet, including fixed expenses, is calculated 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. This amount is also reduced by the fixed expenses related to our subscription business,
which are the pro-rata portion of general and administrative and technology expenses, less stock-based compensation and
depreciation, based on revenues. This amount, on a per pet basis, is 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 lifetime value of a pet, including fixed expenses, to estimate the value we might
expect from new pets over their implied average subscriber life in months, if they behave like the average pet in that respective
period. When evaluating the amount of sales and marketing expenses we may want to incur to attract new pet enrollments, we
refer to the lifetime value of a pet, including fixed expenses, as well as our estimated internal rate of return calculation for an
average pet, which also includes an estimated surplus capital charge, to inform the amount of acquisition spend in relation to
the estimated payback period.
Starting with the year ended December 31, 2019, we have modified our calculation of lifetime value of a pet (LVP) to include
fixed expenses in order to make this a more fulsome metric when evaluating the payback period compared to pet acquisition
cost. The following table reflects the reconciliation of our historical presentation of LVP to lifetime value of a pet, including
fixed expenses, for our subscription business in the periods indicated:
Lifetime value of a pet (LVP)
Minus: fixed expenses per pet
Lifetime value of a pet, including fixed expenses
Year Ended December 31,
2019
2018
2017
$
$
753
230
523
$
$
710
261
449
$
$
727
318
409
36
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 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, 2019 is an average of each month’s retention from January 1, 2019 through December 31, 2019. 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.
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,
2019
2018
2017
$
$
$
35,451
(2,957)
$
24,999
(2,587)
(2,120)
(414)
29,960
$
(1,335)
(377)
20,700
$
19,104
(2,169)
(722)
(218)
15,995
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
Period Ended
$
9,212
$
9,255
$
8,757
$
8,227
$
6,994
$
6,365
$
5,702
$
5,938
(730)
(790)
(734)
(703)
(655)
(693)
(624)
(616)
(547)
(577)
(567)
(429)
(355)
(358)
(349)
(273)
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
$
7,783
$
7,794
$
7,418
$
37
(152)
(94)
(38)
(130)
6,965
$
(102)
5,882
$
(99)
5,215
$
(88)
4,641
$
(87)
4,962
Components of Operating Results
General
We operate in two segments: subscription business and other business. Our subscription business segment includes revenue and
expenses related to monthly subscriptions for our pet medical insurance, which we market directly to consumers. When we do
not directly market 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.
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, as well as
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.
Gain (loss) from investment in joint venture
Gain (loss) from investment in joint venture consists of the share of income and losses from our equity method
investment in a joint venture, as well as income and expenses associated with administrative services provided to the
joint venture.
38
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, other initiatives across our business may temporarily impact retention and make it
difficult for us to improve or maintain this metric. For example, 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 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 estimated
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 mix of business between the United States
and Canada changes, our metrics, such as our monthly average revenue per pet, and our exposure to foreign exchange
fluctuations will be impacted. Any expansion into other international markets could have similar effects.
Other business segment. Our other business segment primarily includes revenue and expenses related to policies written on
behalf of third parties. This segment includes products that have been in the past, and may be in the future, 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.
39
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,
2019
2018
2017
(in thousands)
$
321,163
$
263,738
$
218,354
62,773
383,936
262,139
56,873
319,012
59,024
5,900
64,924
10,074
20,967
35,451
66,492
(352)
(1,920)
1,349
(1,629)
(1,640)
169
(1,809) $
40,218
303,956
215,992
36,598
252,590
47,746
3,620
51,366
9,248
18,164
24,999
52,411
—
(1,045)
1,198
(1,309)
(934)
(7)
(927) $
24,313
242,667
176,883
22,734
199,617
41,471
1,579
43,050
9,768
16,820
19,104
45,692
—
(2,642)
533
(1,244)
(1,931)
(428)
(1,503)
Year Ended December 31,
2019
2018
2017
(in thousands)
1,050
$
364
3,312
2,120
6,846
$
927
209
2,304
1,335
4,775
$
$
594
216
1,887
722
3,419
$
$
$
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
Gain (loss) from investment in joint venture
Operating loss
Interest expense
Other income, net
Loss before income taxes
Income tax expense (benefit)
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
40
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 expense (benefit)
Net loss
Subscription business revenue
Subscription business cost of revenue
Subscription business gross profit
Comparison of the years ended December 31, 2019, 2018, and 2017
Revenue
Year Ended December 31,
2019
2018
2017
(as a percentage of revenue)
100 %
100 %
100 %
83
17
3
5
9
17
(1)
—
—
—
—
83
17
3
6
8
17
—
—
—
—
—
82
18
4
7
8
19
(1)
—
(1)
(1)
—
— %
— %
(1)%
Year Ended December 31,
2019
2018
2017
(as a percentage of subscription revenue)
100%
82
18%
100%
82
18%
100%
81
19%
Revenue:
Subscription business
Other business
Total revenue
Percentage of Revenue by Segment:
Subscription business
Other business
Total revenue
Year Ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
(in thousands, except percentages, pet and per pet data)
$
$
321,163
62,773
383,936
$
$
263,738
40,218
303,956
$
$
218,354
24,313
242,667
22%
56
26
21%
65
25
84%
16
100%
87%
13
100%
90%
10
100%
423,194
371,683
52.07
98.63%
24
15
6
23
16
4
Total pets enrolled (at period end)
Total subscription pets enrolled (at period end)
646,728
494,026
521,326
430,770
Monthly average revenue per pet
Average monthly retention
$
57.52
$
54.34
$
98.58%
98.60%
41
Year ended December 31, 2019 compared to year ended December 31, 2018. Total revenue increased by $80.0 million to
$383.9 million for the year ended December 31, 2019, or 26%. Revenue from our subscription business segment increased by
$57.4 million to $321.2 million for the year ended December 31, 2019, or 22%. This increase was primarily due to a 15%
increase in total subscription pets enrolled as of December 31, 2019 compared to December 31, 2018 and increased average
revenue per pet of 6% for the same period. Increases in pricing were due to the increased cost and utilization of veterinary care.
Revenue from our other business segment increased by $22.6 million to $62.8 million for the year ended December 31, 2019,
or 56%, primarily due to the 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
Year Ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
(in thousands, except percentages, pet and per pet data)
$
232,415
$
191,051
$
155,554
22%
23%
29,724
262,139
59,024
38,532
18,341
56,873
24,941
215,992
47,746
23,488
13,110
36,598
21,329
176,883
41,471
14,568
8,166
22,734
1,579
19
21
24
64
40
55
63
17
22
15
61
61
61
129
Gross profit
$
5,900
$
3,620
$
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
72%
72%
71%
9
82
18
61
29
91
9
9
82
18
58
33
91
9
10
81
19
60
34
94
6
Total pets enrolled (at period end)
Total subscription pets enrolled (at period end)
646,728
494,026
521,326
430,770
423,194
371,683
Monthly average revenue per pet
$
57.52
$
54.34
$
52.07
24
15
6
23
16
4
Year ended December 31, 2019 compared to year ended December 31, 2018. Cost of revenue for our subscription business
segment was $262.1 million, or 82% of revenue, for the year ended December 31, 2019, compared to $216.0 million, or 82%,
of revenue for the year ended December 31, 2018. This $46.1 million increase in subscription cost of revenue was primarily the
result of a 15% increase in subscription pets enrolled and an increase of 6% in veterinary invoice expense per pet due to
increases in the cost and utilization of veterinary care. Cost of revenue for our other business segment increased by $20.3
million, or 55%, to $56.9 million for the year ended December 31, 2019, primarily due to the increase in enrolled pets in this
segment.
42
Technology and Development Expenses
Year Ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
(in thousands, except percentages)
Technology and development
$
10,074
$
9,248
$
9,768
9%
(5)%
Percentage of total revenue
3%
3%
4%
Year ended December 31, 2019 compared to year ended December 31, 2018. Technology and development expenses increased
by $0.8 million, or 9%, to $10.1 million for the year ended December 31, 2019. The change was primarily due to a $1.0 million
increase in compensation and third party contractor expenses, net of capitalization, partially offset by a $0.4 million decrease in
depreciation and amortization expenses. Technology and development expenses remained consistent at 3% as a percentage of
revenue year over year.
General and Administrative Expenses
Year Ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
(in thousands, except percentages)
General and administrative
Percentage of total revenue
$
20,967
$
18,164
$
16,820
15%
8%
5%
6%
7%
Year ended December 31, 2019 compared to year ended December 31, 2018. General and administrative expenses increased
by $2.8 million, or 15%, to $21.0 million for the year ended December 31, 2019. The change was primarily due to a $3.1
million increase in compensation expenses, a $0.8 million increase in professional service fees, and a $1.5 million increase in
depreciation expense mainly due to owning our home office building since August 2018, partially offset by a total of $2.6
million in savings from additional lease income and less rental expense. General and administrative expenses decreased from
6% to 5% as a percentage of revenue for the year ended December 31, 2019, as we experienced scale in our support functions.
Sales and Marketing Expenses
Sales and marketing
Percentage of total revenue
Subscription Business:
Year Ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
$
35,451
$
24,999
$
19,104
42%
31%
(in thousands, except pet and per pet data)
9%
8%
8%
Total subscription pets enrolled (at period
end)
Average pet acquisition cost (PAC)
$
494,026
212
430,770
164
371,683
152
$
$
15
29
16
8
Year ended December 31, 2019 compared to year ended December 31, 2018. Sales and marketing expense increased by $10.5
million, or 42%, to $35.5 million, for the year ended December 31, 2019. The change was primarily due to a 34% increase in
headcount mainly within the account management, conversion and content teams, as well as an approximate $3.5 million
increase in other sales and marketing initiatives primarily related to conversion. Sales and marketing expenses were 9% as a
percentage of revenue for the year ended December 31, 2019, compared to 8% in the prior year.
43
Total Other (Income) Expense, Net
Interest expense
Other income, net
Total other (income) expense, net
Year Ended December 31,
2019
2018
2017
(in thousands)
$
$
$
1,349
(1,629)
(280) $
$
1,198
(1,309)
(111) $
533
(1,244)
(711)
Year ended December 31, 2019 compared to year ended December 31, 2018. Total other (income) expense, net increased by
$0.2 million, primarily due to higher interest income from increased investment balance, partially offset by higher interest
expense on debt.
Income Tax Expense (Benefit)
Income tax expense (benefit)
Effective tax rate
Year Ended December 31,
2019
2018
2017
(in thousands, except percentages)
$
169
$
(10.3)%
$
(7)
0.8%
(428)
22.2%
Year ended December 31, 2019 compared to year ended December 31, 2018. The change in our effective tax rate from 2018 to
2019 was primarily caused by an increase in our net deferred tax liability resulting from an increase in the effective state tax
rate.
44
Quarterly Results of Operations
The following tables contain selected quarterly financial information for the years ended December 31, 2019 and 2018. 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,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
(in thousands)
Revenue:
Subscription business
$
86,592
$
82,613
$
77,736
$
74,222
$
70,933
$
67,421
$
63,867
$
61,517
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
Gain (loss) from investment in
joint venture
Operating income (loss)
Interest expense
Other income, net
Income (loss) before income
taxes
Income tax expense (benefit)
Net income (loss)
$
18,891
105,483
70,718
17,031
87,749
15,874
1,860
17,734
2,556
5,312
9,212
16,663
99,276
66,770
15,061
81,831
15,843
1,602
17,445
2,271
5,017
9,255
14,463
92,199
64,264
13,222
77,486
13,472
1,241
14,713
2,578
5,219
8,757
12,756
86,978
60,387
11,559
71,946
13,835
1,197
15,032
2,669
5,419
8,227
11,707
82,640
57,892
10,543
68,435
13,041
1,164
14,205
2,487
4,922
6,994
10,743
78,164
54,753
9,667
64,420
12,668
1,076
13,744
2,299
4,174
6,365
9,525
73,392
52,333
8,706
61,039
8,243
69,760
51,014
7,682
58,696
11,534
10,503
819
561
12,353
11,064
2,298
4,610
5,702
2,164
4,458
5,938
17,080
16,543
16,554
16,315
14,403
12,838
12,610
12,560
(21)
633
375
(535)
793
157
636
(59)
843
340
(297)
800
18
(272)
(2,113)
317
(453)
—
(1,283)
317
(344)
—
(198)
311
(238)
—
906
336
(628)
—
(257)
332
(303)
—
(1,496)
219
(140)
(1,977)
(1,256)
(271)
1,198
(286)
(1,575)
(46)
40
4
(7)
91
(95)
$
782
$
(1,931) $
(1,296) $
(275) $
1,205
$
(377) $
(1,480)
(1) Includes stock-based compensation expense as follows (in thousands):
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
Three Months Ended
Cost of revenue
$
267
$
258
$
Technology and development
General and administrative
Sales and marketing
Total stock-based
compensation expense
97
860
547
94
916
577
(in thousands)
$
247
$
230
$
249
$
252
$
63
618
429
42
595
355
58
634
358
60
625
349
278
110
918
567
197
49
449
273
$
1,771
$
1,845
$
1,873
$
1,357
$
1,222
$
1,299
$
1,286
$
968
45
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
Period Ended
Other Financial and
Operational Data:
Total Business:
Total pets enrolled (at period
end)
Subscription Business:
Total subscription pets
enrolled (at period end)
Monthly average revenue per
pet
Lifetime value of a pet,
including fixed expenses
Average pet acquisition cost
(PAC)
646,728
613,694
577,686
548,002
521,326
497,942
472,480
446,533
494,026
479,427
461,314
445,148
430,770
416,527
401,033
385,640
$
$
$
58.58
523
222
$
$
$
58.12
511
208
$
$
$
57.11
482
213
$
$
$
56.13
471
205
$
$
$
55.15
449
186
$
$
$
54.55
435
155
$
$
$
53.96
431
150
$
$
$
53.62
419
165
Average monthly retention
98.58%
98.59%
98.57%
98.58%
98.60%
98.61%
98.64%
98.63%
Three Months Ended
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
(as a percentage of revenue)
100%
100%
100 %
100 %
100 %
100%
100 %
100 %
83
17
2
5
9
16
—
1
—
(1)
1
—
82
18
2
5
9
17
—
1
—
—
1
—
84
16
3
6
9
18
—
(2)
—
—
(2)
—
83
17
3
7
9
19
—
(1)
—
—
(1)
—
83
17
3
6
8
17
—
—
—
—
—
—
82
18
3
5
8
16
—
1
—
(1)
2
—
83
17
3
6
8
17
—
—
—
—
—
—
84
16
3
6
8
18
—
(3)
—
—
(2)
—
Revenue
Cost of revenue
Gross profit
Operating expenses:
Technology and
development
General and administrative
Sales and marketing
Total operating expenses
Gain (loss) from investment in
joint venture
Operating income (loss)
Interest expense
Other income, net
Income (loss) before income
taxes
Income tax expense (benefit)
Net income (loss)
1%
1%
(2)%
(1)%
— %
2%
(1)%
(2)%
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
(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
82
81
83
81
82
81
82
83
18%
19%
17%
19%
18%
19%
18%
17%
46
Liquidity and Capital Resources
The following table summarizes our cash flows for the periods indicated (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net change in cash, cash equivalents, and restricted cash
Year Ended December 31,
2019
2018
2017
$
16,157
(28,008)
14,044
423
2,616
$
12,680
(81,451)
71,229
(812)
1,646
$
$
9,666
(13,056)
5,081
378
2,069
$
$
Our primary sources of liquidity are cash provided by operations and available borrowings on our line of credit. In June 2018,
we increased the borrowing capacity on our line of credit from $30.0 million to $50.0 million. In addition, we completed the
June 2018 follow-on public offering, raising aggregate net proceeds of $65.7 million, primarily to fund the purchase of our
home office building in August 2018. 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, 2019, we had $98.9 million of cash, cash equivalents, and short-term investments and $23.3 million
available under our line of credit, which excluded $0.5 million reserved for ancillary services. Most of the assets in our
insurance subsidiary, American Pet Insurance Company (APIC), and our segregated cell business, Wyndham Insurance
Company (SAC) Limited (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, 2019, total assets and liabilities held
outside of our insurance entities were $94.2 million and $42.0 million, respectively, including $5.3 million of cash and cash
equivalents that were segregated from other operating funds and held in trust for the payment of veterinary invoices on behalf
of our insurance 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.
In November 2019, our board of directors approved a share repurchase program, pursuant to which we may repurchase up to
$15.0 million of our outstanding shares over the next 12 months. Each quarter throughout this period, we intend to establish
repurchase parameters reflecting our business’s capital allocation priorities, the market price of our common stock and general
market conditions. We cannot predict when or if we will repurchase any shares of common stock, as such repurchases will
depend on a number of factors, some of which are beyond our control. We did not repurchase any shares under this program for
the year ended December 31, 2019.
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 $16.2 million for the year
ended December 31, 2019, compared to cash provided by operating activities of $12.7 million for the year ended December 31,
2018. The $3.5 million increase was primarily driven by increased pet count and scale in our operating departments, as well as
timing differences between collections from members and payments of veterinary invoices and payments to vendors. Changes
in accounts receivable were primarily related to annual policies with monthly payment terms within our other business
segment.
Investing Cash Flows
Net cash used in investing activities for the year ended December 31, 2019 was primarily related to the net purchase of
investments to increase our statutory capital. As of December 31, 2019, we had $74.0 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 and we anticipate that we will need to maintain greater amounts of risk-based capital if our pet enrollments
continue to grow. Net cash used in investing activities decreased by $53.4 million for the year over year, primarily related to the
$55.0 million cash portion of the building acquisition in August 2018.
47
Financing Cash Flows
Cash provided by financing activities was $14.0 million and $71.2 million for the years ended December 31, 2019 and 2018,
respectively. The decrease of $57.2 million was primarily due to net proceeds of $65.7 million received from the June 2018
follow-on public offering, partially offset by a $10.0 million repayment of the line of credit in the prior year.
Long-Term Debt
Pacific Western Bank Loan and Security Agreement
We have a syndicated loan agreement with Pacific Western Bank (PWB) and Western Alliance Bank (WAB), providing us a
revolving line of credit of up to $50.0 million with a maturity date in June 2022. We refer to this line of credit 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 $50.0 million or the total amount of cash and securities held by our insurance
entities, less amounts outstanding relating to other ancillary services and letters of credit, totaling $0.5 million as of December
31, 2019. Interest on the PWB credit facility accrues at a variable annual rate equal to the greater of 4.5% or 0.75% plus the
prime rate (5.50% at December 31, 2019).
The PWB credit facility requires us to maintain certain financial and non-financial covenants, including maintaining a
minimum cash balance of $1.4 million in our account at WAB and/or WAB affiliates and other cash or investments of $2.1
million in our accounts at PWB. As of December 31, 2019, 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, 2019, we had $26.2 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 vendor service agreements. For enforceable and legally binding contracts, our contractual cash obligations
as of December 31, 2019 are set forth below (in thousands):
Long-term debt obligations(1)
Lease obligations
Other obligations(2)
Total
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
$
$
26,200
$
— $
26,200
$
— $
90
7,594
40
3,320
50
1,573
33,884
$
3,360
$
27,823
$
—
405
405
$
—
—
2,296
2,296
(1) Consists of our revolving line of credit. Excludes interest of the greater of 4.5% or 0.75% plus the prime rate (5.50% at December 31, 2019).
(2) Consists of contractual obligations from non-cancellable vendor service agreements.
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.
48
Reserve for Veterinary Invoices
We use the paid loss development method (chain-ladder method) to estimate reserves for veterinary invoices for our
subscription and for the majority of our other business segment. Paid loss development factors are estimated based on historical
paid loss triangles. The reserve 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, 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.
As of December 31, 2019, our reserve for veterinary invoices was $21.2 million, consisting of $19.2 million for the amount we
expect to pay in the future for veterinary invoices dated between January 1, 2019 and December 31, 2019, inclusive of related
processing costs, and a reserve of $2.0 million for invoices dated prior to January 1, 2019. We believe the reserve amount as
of December 31, 2019 is adequate, and we do not believe that there are any reasonably likely changes in the facts or
circumstances underlying key assumptions that would result in the reserve balance being insufficient in an amount that would
have a material impact on our reported results, financial position or liquidity. The ultimate liability, however, may be in excess
of or less than the amount we have reserved.
For the year ended December 31, 2019, we paid $14.3 million for veterinary invoices dated on or before December 31, 2018,
including related processing costs. Our reserve estimate for these expenses was $16.1 million as of December 31, 2018. As of
December 31, 2019, we reevaluated the remaining reserve for those periods prior to December 31, 2018 and recorded an
adjustment to our income statement to increase it by $0.2 million.
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.
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 Topic 14, Share-Based Payment;
• 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.
49
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 PWB
and WAB bears interest at the rate of the greater of 4.5% or 0.75% plus the prime rate. As of December 31, 2019, our aggregate
outstanding indebtedness was $26.2 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 18% 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 $6.8 million, total expenses by approximately $4.8 million, and
have a net impact of $2.0 million of income or loss for the year ended December 31, 2019. To date, we have not entered into
any material foreign currency hedging contracts although we may do so in the future.
50
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
52
54
55
56
57
58
59
51
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, 2019
and 2018, the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2019, 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,
2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 13, 2020 expressed an unqualified opinion thereon.
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 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. 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.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the account or disclosure to which it relates.
52
Description of the Matter
How We Addressed the
Matter in Our Audit
Reserve for Veterinary Invoices
The Company’s reserve for veterinary invoices totaled $21.2 million as of December
31, 2019. As discussed in Note 1 to the financial statements, the Company’s reserve
for veterinary invoices is based on an actuarial analysis of the Company’s 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 the veterinary invoice, the
members’ chosen deductibles and the Company’s expected cost to process and
administer payments.
Auditing the Company’s reserve for veterinary invoices is complex due to the
sensitivity of the estimated reserve to management assumptions including frequency
and severity of loss and development factors applied to paid and reported invoices.
We evaluated the design and tested the operating effectiveness of controls over the
reserve for veterinary invoices process, including controls over the completeness
and accuracy of the data used in management’s actuarial projections and the review
and approval processes that management has in place for the methods and
assumptions used by management’s actuaries in estimating the reserves.
To evaluate the reserve for veterinary invoices, our audit procedures included,
among others, testing the completeness and accuracy of the underlying invoice data
and related contracts. We involved our actuarial specialists to assist in our evaluation
of management’s methodologies and assumptions used in the calculation of the
reserve and compared the Company’s recorded reserve to a range of reasonable
estimates developed independently by our actuarial specialists.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Seattle, Washington
February 13, 2020
53
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
Gain (loss) from investment in joint venture
Operating loss
Interest expense
Other income, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss per share:
Basic and Diluted
Weighted average shares of common stock outstanding:
Basic and Diluted
Year Ended December 31,
2019
2018
2017
$
383,936
$
303,956
$
242,667
270,947
48,065
64,924
10,074
20,967
35,451
66,492
(352)
(1,920)
1,349
(1,629)
(1,640)
169
(1,809) $
214,539
38,051
51,366
9,248
18,164
24,999
52,411
—
(1,045)
1,198
(1,309)
(934)
(7)
(927) $
170,122
29,495
43,050
9,768
16,820
19,104
45,692
—
(2,642)
533
(1,244)
(1,931)
(428)
(1,503)
(0.05) $
(0.03) $
(0.05)
34,645,345
31,961,192
29,588,324
$
$
54
Trupanion, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustments
Net unrealized gain (loss) on available-for-sale debt securities
Other comprehensive income (loss), net of taxes
Comprehensive loss
Year Ended December 31,
2019
2018
2017
$
(1,809) $
(927) $
(1,503)
359
644
1,003
(806) $
(642)
(19)
(661)
(1,588) $
277
8
285
(1,218)
$
55
Trupanion, Inc.
Consolidated Balance Sheets
(in thousands, except 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
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,
2019 and December 31, 2018, 35,876,882 and 34,947,017 shares issued and outstanding at
December 31, 2019; 34,781,121 and 34,025,136 shares issued and outstanding at December 31,
2018
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31,
2019 and December 31, 2018, and 0 shares issued and outstanding at December 31, 2019 and
December 31, 2018
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Treasury stock, at cost: 929,865 shares at December 31, 2019 and 755,985 shares at December
31, 2018
Total stockholders’ equity
Total liabilities and stockholders’ equity
56
December 31,
2019
2018
$
29,168
$
69,732
54,408
5,513
158,821
1,400
4,323
70,372
7,731
14,553
26,552
54,559
31,565
5,300
117,976
1,400
3,554
69,803
8,071
6,706
257,200
$
207,510
$
$
4,087
$
13,798
21,194
52,546
91,625
26,086
1,118
1,611
120,440
—
—
232,731
250
(85,520)
(10,701)
136,760
2,767
11,347
16,062
33,027
63,203
12,862
1,002
1,270
78,337
—
—
219,838
(753)
(83,711)
(6,201)
129,173
207,510
$
257,200
$
Trupanion, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Common Stock
Shares
Amount
Additional Paid-
in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss) Treasury Stock
Total
Stockholders'
Equity
Balance at January 1, 2017
29,498,947 $
— $
129,574 $
(81,281) $
(377) $
(3,201) $
44,715
Issuance of common stock in connection with the Company's
equity award programs, net of tax withholdings
Stock-based compensation expense
Other comprehensive income
Net loss
Balance at December 31, 2017
Issuance of common stock from follow-on public offering
Issuance of common stock for acquisition of corporate real estate
Exercise of warrants, net
Issuance of common stock in connection with the Company's
equity award programs, net of tax withholdings
Stock-based compensation expense
Other comprehensive income
Net loss
Balance at December 31, 2018
Exercise of warrants, net
Issuance of common stock in connection with the Company's
equity award programs, net of tax withholdings
Stock-based compensation expense
Other comprehensive income
Net loss
622,549
—
—
—
30,121,496
2,090,909
303,030
231,315
1,278,386
—
—
—
34,025,136
306,120
615,761
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,375
3,562
—
—
134,511
65,638
9,633
3,300
1,806
4,950
—
—
219,838
4,800
1,043
7,050
—
—
—
—
—
(1,503)
(82,784)
—
—
—
—
—
—
(927)
(83,711)
—
—
—
—
(1,809)
—
—
285
—
(92)
—
—
—
—
—
(661)
—
(753)
—
—
—
1,003
—
—
—
—
—
(3,201)
—
—
(3,000)
—
—
—
—
1,375
3,562
285
(1,503)
48,434
65,638
9,633
300
1,806
4,950
(661)
(927)
(6,201)
(4,500)
129,173
300
—
—
—
—
1,043
7,050
1,003
(1,809)
Balance at December 31, 2019
34,947,017 $
— $
232,731 $
(85,520) $
250 $
(10,701) $
136,760
57
Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to cash provided by operating activities:
Year Ended December 31,
2018
2017
2019
$
(1,809) $
(927) $
(1,503)
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 operating activities
Investing activities
Purchases of investment securities
Maturities of investment securities
Purchases of other investments
Acquisition of lease intangibles, related to corporate real estate acquisition
Proceeds from sale of equity method investment
Purchases of property and equipment
Other
Net cash used in investing activities
Financing activities
Proceeds from public offering of common stock, net of offering costs
Proceeds from exercise of stock options
Shares withheld to satisfy tax withholding
Proceeds from debt financing, net of financing fees
Repayment of debt financing
Other financing
Net cash provided by 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:
Issuance of common stock for cashless exercise of warrants
Issuance of common stock for acquisition of corporate real estate
Purchases of property and equipment included in accounts payable
and accrued liabilities
Property and equipment acquired under financing leases
$
$
$
58
5,632
6,846
—
105
(22,772)
(432)
4,110
5,059
19,418
16,157
(65,506)
49,762
(4,000)
—
—
(5,373)
(2,891)
(28,008)
—
2,982
(1,667)
13,167
—
(438)
14,044
423
2,616
27,952
30,568
158
1,188
4,500
—
$
$
4,512
4,775
—
(240)
(11,248)
(2,628)
4,531
3,440
10,465
12,680
(52,862)
35,413
(3,000)
(2,959)
—
(56,936)
(1,107)
(81,451)
65,671
3,601
(1,839)
13,431
(10,000)
365
71,229
(812)
1,646
26,306
27,952
216
1,019
3,000
9,640
$
$
485
— $
106
— $
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
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.
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, 2019, 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. Accounts receivable balance is primarily related to the Company’s other business
segment where the Company generates revenue from underwriting policies through unaffiliated general agents. These policies
are typically annual policies, with monthly payment terms through the end of the twelve-month period. The Company had
$50.0 million and $27.6 million accounts receivable associated with underwriting these policies as of December 31, 2019 and
2018, respectively.
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 as of
December 31, 2019 and December 31, 2018 were $1.8 million and $1.3 million, respectively. Amortized deferred acquisition
costs classified within sales and marketing amounted to $2.5 million, $2.1 million, and $1.7 million and amortized deferred
acquisition costs classified within other cost of revenue amounted to $19.2 million, $15.9 million, and $13.2 million, for the
years ended December 31, 2019, 2018, and 2017, 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.
59
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 7, 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 building, land and land improvements, office equipment, 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:
Land
Land improvements
Building
Software
Office equipment
Intangible Assets
Not depreciable
10 years
39 years
3 to 5 years
3 to 5 years
Acquired finite-lived intangibles are amortized on a straight-line basis over the estimated useful lives of the 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, equipment, and intangible assets, 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, 2019, 2018, and 2017.
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. As of each balance sheet date, the Company reevaluates its reserve and may adjust the
estimate for new information.
60
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.
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 primarily consist of personnel costs and related expenses for the Company's technology
staff, which includes information technology development and infrastructure support and third-party services, as well as
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, regulatory, 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, net, was $1.6 million, $1.3 million, and $1.2 million, including interest income of $1.7 million, $0.9 million, and
$0.2 million for the years ended December 31, 2019, 2018, and 2017, respectively. Other income in the year ended December
31, 2017 included a gain of $1.0 million from the sale of the Company's equity method investment.
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 $7.8 million, $6.3 million and $4.9 million, in the years ended
December 31, 2019, 2018 and 2017, respectively.
61
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 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 Topic 14, Share-Based
Payment;
• 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.
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 $0.4 million, $0.7 million, and $0.1 million were recorded in
accumulated other comprehensive loss as of December 31, 2019, 2018, and 2017, 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. Dividends are 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.
62
For the Company’s Canadian business, all plans are written by 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 2019, 2018, and 2017 was $67.5 million, $57.4 million and $47.1
million, respectively, and deferred revenue relating to this arrangement at December 31, 2019 and 2018 was $2.7 million and
$2.1 million, respectively. Reinsurance revenue was 18% of total revenue in 2019 and was 19% in 2018 and 2017. Cash
designated for the purpose of paying claims related to this reinsurance agreement was $4.6 million and $3.9 million at
December 31, 2019 and 2018, 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, 2019, the account balance was CAD $4.3 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.
Recently Adopted Accounting Pronouncements
The Company adopted Accounting Standards Update (ASU) No. 2016-02 Leases (Topic 842), as amended, using the modified
retrospective approach under which the transition provisions were applied as of January 1, 2019. In addition, the Company
elected the “package of practical expedients” under the transition guidance within the new standard to not reassess prior
conclusions about lease identification, lease classification, and initial direct costs for existing lease contracts. The Company
also elected the practical expedient to not separate lease and non-lease components, if any, for all lease contracts.
Upon adoption of this standard, the Company recorded approximately $0.1 million right-of-use assets and lease liabilities for
operating leases. They were classified as other long-term assets and other liabilities on the Company's consolidated balance
sheets. The standard did not have a material impact on the Company's consolidated statements of operations, stockholders'
equity, or cash flows.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued an ASU amending the measurement of credit losses on
financial instruments. The ASU requires the measurement and recognition of expected credit losses for financial assets held at
amortized cost. This replaces the existing incurred loss impairment model with an expected loss methodology, which will result
in more timely recognition of credit losses. This ASU is effective for fiscal years beginning after December 15, 2019, including
interim periods within that reporting period, with early adoption permitted. The Company does not expect the adoption of this
standard to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued an ASU that eliminates certain disclosure requirements for fair value measurements, requires
new disclosures regarding significant unobservable inputs used to develop Level 3 fair value measurements, and modifies
certain existing disclosure requirements for Level 3 fair value measurements. This ASU is effective for fiscal years beginning
after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company
does not expect the adoption of this standard to have a material 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.
63
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):
Land and improvements
Building and improvements
Software
Office equipment and other
Construction in progress
Property and equipment, at cost
Less: Accumulated depreciation
Property and equipment, net
As of December 31,
2019
2,097,978
581,943
—
2018
2017
2,621,503
4,006,399
451,160
480,000
256,842
810,000
December 31,
2019
2018
$
15,854
$
47,558
22,976
3,384
247
90,019
(19,647)
70,372
$
$
15,833
46,561
20,338
2,772
—
85,504
(15,701)
69,803
Depreciation expense related to property and equipment was $4.7 million, $4.3 million and $4.2 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
Acquisition of Real Estate
In August 2018, the Company purchased a real property that houses the company headquarters located at 6100 Fourth Avenue
South, Seattle, Washington. The real estate acquisition was determined to be an asset acquisition, with the purchase price
allocated based on relative fair value of the assets acquired. Additionally, acquisition-related expenses were capitalized as part
of the purchase price. The purchase price was $65.2 million, consisting of $55.0 million in cash, 303,030 shares of common
stock with an estimated fair value of $9.6 million, and transaction costs totaling $0.6 million. The issued shares are subject to a
lock-up period that continues to and includes June 25, 2020. The fair value of the issued shares was estimated as of the closing
date for the real estate acquisition using the Black-Scholes option pricing model and the following assumptions:
Assumptions
Risk free interest rate
Expected volatility
Expected life (years)
Expected dividend yield
August 9, 2018
Fair Value
2.5%
36.72%
1.88
—%
64
The purchase price was allocated to the following assets based on estimates of their relative fair value (in thousands):
Building and improvements
Land and improvements
Lease-related intangible assets
Total purchase price
$
$
46,379
15,833
2,959
65,171
The Company assessed fair value on the date of the acquisition based on Level 3 inputs within the fair value framework, which
included estimated cash flow projections that utilized appropriate discount rates, capitalization rates, renewal probability and
available market information, which included market rental rates and market rent growth rates. Estimates of future cash flows
were based on a number of factors including historical operating results, known and anticipated trends, and market and
economic conditions.
The fair value of tangible assets of the acquired property considers the value of the property as if it were vacant. The fair value
of acquired “above- and below-” market leases was based on the estimated cash flow projections utilizing discount rates that
reflected the risks associated with the leases acquired. The amount recorded was based on the present value of the difference
between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market
lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and
the initial term plus the extended term for any leases with below-market renewal options. Other intangible assets acquired
included amounts for in-place lease values that were based on the Company’s evaluation of the specific characteristics of each
tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market
conditions and costs to execute similar leases. In estimating carrying costs, the Company included estimates of lost rents at
market rates during the hypothetical expected lease-up periods, which were dependent on local market conditions. In estimating
costs to execute similar leases, the Company considered leasing commissions, legal and other related costs.
The results of operations related to our ownership of the building are included in the Company’s consolidated statements of
operations from the date of acquisition.
4. Intangible Assets, Net
The following table presents the detail of intangible assets for the periods presented (in thousands):
December 31, 2019:
Licenses
Leases
Patents, trademarks, and other
Total Intangibles
December 31, 2018:
Licenses
Leases
Patents, trademarks, and other
Total Intangibles
Gross Carrying
Value
Accumulated
Amortization
Net Carrying Value
$
$
$
$
4,773
$
2,959
1,287
9,019
4,773
2,959
743
$
$
8,475
$
— $
(1,084)
(204)
(1,288) $
— $
(213)
(191)
(404) $
4,773
1,875
1,083
7,731
4,773
2,746
552
8,071
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.
The lease-related intangible assets relate to in-place lease agreements associated with the building acquisition in August 2018
and have a remaining weighted-average useful life of 3.4 years. Patents, trademarks, and other intangible assets have a
remaining weighted-average useful life of 9.9 years.
65
Amortization expense associated with intangible assets was $0.9 million and $0.2 million for the years ended December 31,
2019 and 2018, respectively. There was no amortization expense associated with intangible assets in 2017.
As of December 31, 2019, expected amortization expense relating to purchased intangible assets for each of the next five years
and thereafter is as follows (in thousands):
Year ending December 31:
2020
2021
2022
2023
2024
Thereafter
Total
5. Investments
$
$
949
714
245
245
245
493
2,891
The amortized cost, gross unrealized holding gains and losses, and fair value of long-term and short-term investments by major
security type and class of security were as follows as of December 31, 2019 and 2018 (in thousands):
As of December 31, 2019
Long-term investments:
Foreign deposits
Municipal bond
Short-term investments:
U.S. Treasury securities
Certificates of deposit
U.S. government funds
As of December 31, 2018
Long-term investments:
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
$
$
$
3,323
1,000
4,323
6,156
440
63,136
— $
—
— $
— $
—
—
69,732
$
— $
— $
—
— $
(1) $
—
—
(1) $
3,323
1,000
4,323
6,155
440
63,136
69,731
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
$
$
$
2,573
1,000
3,573
6,645
437
47,477
— $
—
— $
— $
—
—
54,559
$
— $
— $
(19)
(19) $
(3) $
—
—
(3) $
2,573
981
3,554
6,642
437
47,477
54,556
$
$
$
$
$
$
$
$
66
Maturities of debt securities classified as available-for-sale were as follows (in thousands):
Available-for-sale:
Due after one year through five years
December 31, 2019
Amortized
Cost
Fair
Value
$
$
4,323
4,323
$
$
4,323
4,323
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 maturity or prior to
the recovery of the amortized cost basis.
6. Other Investments
Investment in Variable Interest Entity
In July 2018, the Company purchased $3.0 million in preferred stock of a privately held corporation with a complementary
business line. The Company does not have power over the activities that most significantly impact the economic performance
of this variable interest entity and is, therefore, not the primary beneficiary. In October 2019, the Company purchased an
additional $4.0 million in preferred stock upon the exercise of an option by the variable interest entity. The Company has an
option to purchase all the outstanding common shares issued by the variable interest entity on the fifth anniversary of the initial
preferred stock purchase.
Additionally, the Company has extended a $2.5 million revolving line of credit to the variable interest entity to fund its
inventory purchases. The Company's investment and amounts loaned under the line of credit are recorded in other long-term
assets on the consolidated balance sheet. Outstanding loan balance under the line of credit was $2.5 million and $0.6 million as
of December 31, 2019 and 2018, respectively. The Company has also entered into a series of agreements to provide ancillary
services to the variable interest entity at cost. The Company provided $1.4 million and $0.6 million of these services for the
years ended December 31, 2019 and 2018, respectively, which were recorded against its operating expenses.
Investment in Joint Venture
In September 2018, the Company acquired a non-controlling equity interest in a joint venture, whereby it has committed to
licensing certain intellectual property and contributing up to $2.2 million AUD upon the achievement of specific operational
milestones over a period of at least four years from the agreement execution date. As of December 31, 2019, the Company has
contributed $0.5 million AUD. This equity investment is accounted for using the equity method and is classified in other long-
term assets on the Company's consolidated balance sheet. The Company's share of income and losses from this equity method
investment is included in gain (loss) from investment in joint venture on its consolidated statement of operations. Also included
in this line item are income and expenses associated with administrative services provided to the joint venture.
67
7. Fair Value
The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring
basis, and placement within the fair value hierarchy (in thousands):
Assets
Restricted cash
Money market funds
Fixed maturities:
Foreign deposits
Municipal bond
Investment in variable interest entity
Total
Assets
Restricted cash
Money market funds
Fixed maturities:
Foreign deposits
Municipal bond
Investment in variable interest entity
Total
As of December 31, 2019
Fair Value
Level 1
Level 2
Level 3
$
1,400
$
1,400
$
— $
1,050
1,050
3,323
1,000
7,625
3,323
—
—
—
—
1,000
—
$
14,398
$
5,773
$
1,000
$
—
—
—
—
7,625
7,625
As of December 31, 2018
Fair Value
Level 1
Level 2
Level 3
$
1,400
$
1,400
$
2,010
2,010
— $
—
2,573
981
3,000
2,573
—
—
—
981
—
$
9,964
$
5,983
$
981
$
—
—
—
—
3,000
3,000
The Company measures the fair value of restricted cash, money market funds, and foreign deposits 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. Short-term investments are carried at amortized cost and the fair value is disclosed in Note 5, Investments. The fair value
of these investments is determined in the same manner as for available-for-sale securities and is considered a Level 1
measurement.
The Company purchased $4.0 million and $3.0 million in preferred stock in the variable interest entity for the year ended
December 31, 2019 and 2018, respectively. The preferred stock investment is accounted for as an available-for-sale debt
security, and measured at fair value at each balance sheet date. The estimated fair value of the preferred stock investment is a
Level 3 measurement, and is based on certain unobservable inputs such as the value of the underlying enterprise, volatility, time
to liquidity, and market interest rates. An increase or decrease in any of these unobservable inputs would result in a change in
the fair value measurement. Fair value was $7.6 million and $3.0 million as of December 31, 2019 and 2018, respectively. The
Company recognized a $0.6 million unrealized gain in other comprehensive income (loss) for the year ended December 31,
2019.
Fair Value Disclosures
The Company's other long-term assets balance included notes receivable of $6.1 million and $3.0 million as of December 31,
2019 and 2018, respectively, recorded at their estimated collectible amount. The Company estimates that the carrying value of
the notes 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, 2019 and December 31, 2018.
The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in
circumstances that caused the transfer. There were no transfers between levels for the year ended December 31, 2019 and 2018.
68
8. Commitments and Contingencies
The following summarizes the Company's contractual commitments as of December 31, 2019 (in thousands):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
— $
— $
26,200
$
— $
— $
— $
26,200
Long-term debt obligations(1) $
Lease obligations
Other obligations(2)
40
3,320
40
1,053
10
520
Total
$
3,360
$
1,093
$
26,730
$
—
237
237
$
—
168
168
—
2,296
90
7,594
$
2,296
$
33,884
(1) Consists of a revolving line of credit. Excludes interest of the greater of 4.5% or 0.75% plus the prime rate (5.50% as of December 31, 2019).
(2) Consists of contractual obligations from non-cancellable vendor service agreements.
Legal Proceedings
Certain state insurance regulators in the United States have contacted the Company regarding whether employees who had
helped prospective members enroll by telephone in prior years were required to have an insurance license to conduct such
telephone conversations. To date, the Company has resolved each of these matters in non-material amounts and believes it is
compliant with the applicable regulations. The Company is currently engaged with a limited number of state insurance
regulators to resolve this same legacy issue and believes it has adequately reserved for these matters.
In addition, from time to time the Company is or may become subject to various legal proceedings arising in the ordinary
course of business, including proceedings against members, other entities or regulatory bodies. Estimated liabilities are
recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. At
this time, the Company does not believe any such matters to be material individually or in the aggregate. These views are
subject to change following the outcome of future events or the results of future developments.
9. 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. 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 invoice expense 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
69
Year Ended December 31,
2019
2018
2017
$
13,875
$
11,059
$
8,538
231,831
585
232,416
217,538
12,494
230,032
718
190,642
409
191,051
177,418
10,130
187,548
687
155,623
(69)
155,554
144,802
7,777
152,579
454
$
15,541
$
13,875
$
11,059
The Company's reserve for the subscription business segment increased $1.6 million from $13.9 million at December 31, 2018
to $15.5 million at December 31, 2019. This change was comprised of $232.4 million in expense recorded during the period
less $230.0 million in payments of veterinary invoices. This $232.4 million in veterinary invoice expense incurred included an
increase of $0.6 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment
trends. The Company's adjustments to prior year reserves were an increase of $0.4 million and a reduction of $0.1 million as a
result of analysis of payment trends in the years ended December 31, 2018 and 2017, respectively.
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 invoice expense 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,
2019
2018
2017
$
2,187
$
1,697
$
983
38,881
(350)
38,531
33,254
1,811
35,065
—
23,784
(296)
23,488
21,615
1,383
22,998
—
$
5,653
$
2,187
$
14,739
(171)
14,568
13,053
801
13,854
—
1,697
The Company’s reserve for the other business segment increased $3.5 million from $2.2 million at December 31, 2018 to $5.7
million at December 31, 2019. This change was comprised of $38.5 million in expense recorded during the period less $35.1
million in payments of veterinary invoices. This $38.5 million in veterinary invoice expense incurred included a reduction of
$0.4 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. The
Company's adjustments to decrease prior year reserves were $0.3 million and $0.2 million as a result of analysis of payment
trends in each of the years ended December 31, 2018 and 2017, respectively.
Veterinary invoice expenses
In the following tables, the cumulative number of veterinary invoices represents the total number received as of December 31,
2019, 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 2016 through 2018 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, 2019.
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
2016
2017
2018
2019
Cumulative veterinary invoice expenses
Reserve
Cumulative
number of
veterinary
invoices
As of December 31,
As of December 31,
2016
2017
2018
2019
2019
2019
(unaudited)
(unaudited)
(unaudited)
$ 124,169
$ 123,954
$ 124,035
$ 124,040
$ 155,398
$ 155,678
$ 155,681
$ 190,316
$ 190,804
$ 232,552
$ 703,077
$
$
$
$
$
137
464
1,365
13,575
15,541
600,143
725,796
870,806
965,768
70
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
2016
2017
2018
2019
Cumulative veterinary invoice expenses
Reserve
Cumulative
number of
veterinary
invoices
As of December 31,
As of December 31,
2016
2017
2018
2019
2019
2019
(unaudited)
(unaudited)
(unaudited)
$
9,027
$
$
8,843
14,738
$
$
$
8,855
14,420
23,782
$
$
$
$
$
8,862
14,471
23,371
38,883
85,587
$
$
$
$
$
1
5
20
5,627
5,653
59,665
105,891
173,778
262,083
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,
2019. Information for years 2016 through 2018 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
2016
2017
2018
2019
Year Ended December 31,
2016
2017
2018
2019
(unaudited)
(unaudited)
(unaudited)
$
115,965
$
$
123,422
145,087
$
$
$
123,764
154,679
177,714
Total amounts unpaid and recorded as a liability
$
$
$
$
$
$
123,902
155,217
189,439
218,977
687,535
15,541
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
2016
2017
2018
2019
Year Ended December 31,
2016
2017
2018
2019
(unaudited)
(unaudited)
(unaudited)
$
8,048
$
$
8,832
13,053
$
$
$
8,852
14,408
21,613
Total amounts unpaid and recorded as a liability
71
$
$
$
$
$
$
8,861
14,466
23,351
33,256
79,934
5,653
10. Debt
The Company has a revolving line of credit of up to $50.0 million, maturing in June 2022. The facility is 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 0.75% plus the prime rate (5.50% at December 31, 2019). The credit agreement includes other ancillary
services and letters of credit of up to $4.5 million. It also requires a deposit of restricted cash of $1.4 million and a minimum
cash or investment balance of $2.1 million. The credit agreement requires the Company to comply with various financial and
non-financial covenants. As of December 31, 2019, the Company was in compliance with all financial and non-financial
covenants required by the credit agreement.
Borrowings on the revolving line of credit were limited to the lesser of $50.0 million or 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), less amounts outstanding relating to other ancillary services and letters of credit. As of
December 31, 2019, available borrowing capacity on the line of credit was $23.3 million, with an outstanding balance of $0.5
million for ancillary services and letters of credit, and borrowings under the facility of $26.2 million, recorded net of financing
fees of $0.1 million.
11. 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, 2019, 2018 and 2017 was as follows (in thousands):
Veterinary invoice expense
Other cost of revenue
Technology and development
General and administrative
Sales and marketing
Total expensed stock-based compensation
Capitalized stock-based compensation
Total stock-based compensation
Year Ended December 31,
2019
2018
2017
$
$
697
353
364
3,312
2,120
6,846
204
$
571
356
209
2,304
1,335
4,775
175
$
7,050
$
4,950
$
355
239
216
1,887
722
3,419
143
3,562
As of December 31, 2019, the Company had 206,387 unvested stock options and 581,943 unvested restricted stock awards and
restricted stock units. Total stock-based compensation expense of $1.4 million related to unvested stock options and $14.6
million related to unvested restricted stock awards and restricted stock units is expected to be recognized over a weighted-
average period of approximately 1.1 years and 3.0 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. The Company did not grant any stock options during the years ended December 31, 2019 and 2018. For the year ended
December 31, 2017, valuation assumptions are presented in the following table:
Valuation assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividend yield
72
Year Ended
December 31,
2017
6.25
37.1%-39.8%
1.8%-2.2%
—%
The following table presents information regarding stock options granted, exercised and forfeited for the periods presented:
Outstanding as of January 1, 2017
Granted
Exercised
Forfeited
Outstanding as of December 31, 2017
Granted
Exercised
Forfeited
Outstanding as of December 31, 2018
Granted
Exercised
Forfeited
Outstanding as of December 31, 2019
Number
of
Options
Weighted Average
Exercise
Price per Share
Aggregate
Intrinsic
Value
(in thousands)
4,123,023
$
5.06
$
43,185
657,339
(670,823)
(103,140)
4,006,399
—
(1,292,037)
(92,859)
2,621,503
—
(510,268)
(13,257)
2,097,978
17.74
3.80
12.25
7.16
—
2.82
15.36
9.01
—
5.28
18.23
9.86
—
10,392
—
88,578
—
36,625
—
43,136
—
13,151
—
57,907
Exercisable at December 31, 2019
1,891,591
$
9.04
$
53,760
As of December 31, 2019, stock options outstanding and stock options exercisable had a weighted average remaining
contractual life of 5.1 years and 4.8 years, respectively.
The weighted-average grant date fair value per share and the fair value of options vested were as follows for the years ended
December 31, 2019, 2018, and 2017:
Year:
2017
2018
2019
Weighted Average
Grant Date Fair
Value per Share
Fair Value
of Options
Vested
(in thousands)
$
$
$
7.25
$
— $
— $
6,313
2,665
1,591
73
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 ended
December 31, 2019, 2018 and 2017:
Unvested shares as of January 1, 2017
Granted
Vested
Forfeited
Unvested shares as of December 31, 2017
Granted
Vested
Forfeited
Unvested shares as of December 31, 2018
Granted
Vested
Forfeited
Unvested shares as of December 31, 2019
12. Leases
Number of
Shares
Weighted Average
Grant Date
Fair Value per
Share
350,631
$
23,659
(116,877)
(571)
256,842
375,313
(149,213)
(31,782)
451,160
459,523
(276,184)
(52,556)
581,943
$
4.77
30.19
4.77
30.19
4.77
28.10
9.74
28.57
22.16
30.03
18.20
29.85
29.56
The Company leases certain office space and equipment from third parties and recognizes lease expense on a straight-line basis
over the lease term. Leases with an initial term of 12 months or less are not recorded on its consolidated balance sheets.
Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease. Rental
expense for operating leases was $0.4 million, $1.4 million and $1.8 million for the years ended December 31, 2019, 2018 and
2017, respectively.
The Company also leases a portion of its building acquired in August 2018 to third parties and records related rental income
within general and administrative expense in the consolidated statements of operations. These leases have remaining initial
lease terms of 2 years to 8 years, some of which give the tenants options to renew the leases for up to an additional 10 years,
and options to terminate the leases after 3 years of the initial lease terms, with early termination fees required. The Company
recorded rental income of $2.2 million and $0.9 million for the years ended December 31, 2019 and December 31, 2018,
respectively.
The following table summarizes the Company's future rental payments to be received from non-cancellable leases in place as of
December 31, 2019 (in thousands):
Year ending December 31:
2020
2021
2022
2023
2024
Thereafter
Total rental payments
$
$
2,002
1,632
1,325
1,367
1,410
1,800
9,536
74
13. Stockholders’ Equity
Common Stock and Preferred Stock
As of December 31, 2019, the Company had 100,000,000 shares of common stock authorized and 34,947,017 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,
2019, 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, 2019 due to restrictions in its credit agreements.
Follow-on Common Stock Offering
In June 2018, the Company completed a follow-on public offering (the June 2018 follow-on public offering) whereby the
Company sold 2,090,909 shares of common stock at a price to the public of $33.00 per share. The Company received aggregate
net proceeds from the June 2018 follow-on public offering of $65.7 million, after deducting underwriting discounts and
commissions and offering expenses payable by the Company. The proceeds were primarily used to purchase real estate
consisting of properties in use as the Company's home office. In addition, in August 2018, the Company issued 303,030 shares
of common stock via a private placement to an accredited investor as a portion of the purchase price of the real estate. See Note
3, Property and Equipment.
Warrants
During the year ended December 31, 2019, 480,000 of the Company's outstanding warrants were exercised. As of December
31, 2019, no warrants remained outstanding.
Share Repurchase Program
In November 2019, the Company's board of directors authorized a share repurchase program, pursuant to which the Company
may repurchase up to $15.0 million of its outstanding shares over the next 12 months. The Company did not repurchase shares
during the year ended December 31, 2019.
14. Segments
The Company has two segments: subscription business and other business. The subscription business segment includes
monthly subscription 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 reviews revenue, gross profit, and operating income (loss) to evaluate segment
performance. Revenue, veterinary invoice expense, other cost of revenue, and sales and marketing expenses are generally
directly attributed to each segment. Other operating expenses, such as technology and development expense and general and
administrative expense, are allocated proportionately based on revenue in each segment. 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.
Operating income (loss) of the Company’s segments were as follows (in thousands):
Subscription business:
Revenue
Veterinary invoice expense
Other cost of revenue
Gross profit
Technology and development
General and administrative
Sales and marketing
Subscription business operating income (loss)
Other business:
Revenue
Veterinary invoice expense
Other cost of revenue
Gross profit
Technology and development
General and administrative
Sales and marketing
Other business operating income (loss)
Gain (loss) from investment in joint venture
Total operating income (loss)
Year Ended December 31,
2019
2018
2017
$
321,163
$
263,738
$
232,415
191,051
29,724
59,024
8,427
17,539
35,037
(1,979)
62,773
38,532
18,341
5,900
1,647
3,428
414
411
(352)
(1,920) $
$
24,941
47,746
8,024
15,761
24,622
(661)
40,218
23,488
13,110
3,620
1,224
2,403
377
(384)
—
(1,045) $
218,354
155,554
21,329
41,471
8,789
15,135
18,886
(1,339)
24,313
14,568
8,166
1,579
979
1,685
218
(1,303)
—
(2,642)
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,
2019
2018
2017
$
$
316,138
67,798
383,936
$
$
246,280
57,676
303,956
$
$
195,297
47,370
242,667
Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2019 and 2018.
76
15. 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, 2019, 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 $1.5 million. This insurance subsidiary did not pay dividends to
the Company during the years ended December 31, 2019, 2018, and 2017.
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 $3.9 million, $2.2 million, and $2.7 million during the years ended
December 31, 2019, 2018 and 2017, respectfully.
The statutory net income for 2019, 2018 and 2017 and statutory capital and surplus at December 31, 2019, 2018 and 2017, 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,
2019
2018
2017
$
$
16,311
73,810
$
$
11,021
56,244
$
$
7,507
37,190
As of December 31, 2019, the Company’s insurance subsidiary in New York maintained $73.8 million of statutory capital and
surplus which was above the required amount of $55.3 million of statutory capital and surplus to avoid additional regulatory
oversight.
As of December 31, 2019, the Company had $6.7 million on deposit with various states in which it writes policies.
16. Income Taxes
Loss before income taxes was as follows for the years ended December 31, 2019, 2018 and 2017 (in thousands):
United States
Foreign
Year Ended December 31,
2019
2018
2017
$
$
(1,783) $
143
(1,640) $
(1,054) $
120
(934) $
(1,965)
34
(1,931)
77
The components of income tax expense (benefit) were as follows (in thousands):
Year Ended December 31,
2019
2018
2017
Current:
U.S. federal & state
Foreign
Deferred:
U.S. federal & state
Foreign
$
$
12
52
64
116
(11)
105
Income tax expense (benefit)
$
169
$
(10) $
37
27
(32)
(2)
(34)
(7) $
183
15
198
(620)
(6)
(626)
(428)
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. In
accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), the Company recorded a $0.6 million income tax benefit in
the year ended December 31, 2017 in relation to the remeasurement of its deferred tax liabilities.
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
Nondeductible fines and settlements
Other, net
Change in federal tax rate
Credits
Effective income tax rate
Year Ended December 31,
2019
2018
2017
21.0 %
(7.8)
177.2
(184.2)
(4.9)
(9.2)
(11.6)
—
9.2
(10.3)%
21.0%
4.6
828.5
(857.4)
(5.4)
(2.1)
(8.6)
—
20.2
0.8%
34.0%
(9.5)
189.1
(229.6)
(3.0)
—
2.0
32.1
7.1
22.2%
78
The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
Year Ended December 31,
2019
2018
Deferred tax assets:
Deferred revenue
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
Other
Total deferred tax liabilities
Total deferred taxes
$
2,219
$
885
30,569
240
2,102
547
243
36,805
(398)
(1,117)
(775)
(2,290)
34,515
(35,609)
(1,094) $
1,371
475
26,566
346
1,690
397
430
31,275
(279)
(1,002)
(250)
(1,531)
29,744
(30,701)
(957)
Less deferred tax asset valuation allowance
Net deferred tax liability
$
At December 31, 2019, the Company had U.S. federal and state net operating loss carryforwards of $30.6 million (tax-effected)
and U.S. federal income tax credits of $0.5 million. Use of carryforwards is limited based on the future income of the
Company. The federal net operating loss carryforwards will begin to expire in 2027. 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, 2019, 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 U.S. Federal deferred tax
assets as of December 31, 2019 and 2018 because the Company’s management has determined that it is more likely than not
that these assets will not be fully realized.
For the year ended December 31, 2019, the Company recognized a net increase of $4.9 million in valuation allowance against
its net deferred tax assets associated with U.S. federal and certain state jurisdictions, primarily attributable to current year
activity.
The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2016 through 2019.
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, 2015 through 2019 for all corporate tax matters, and open for the years ended December 31,
2012 through 2019 for transactions with non-arm’s length non-Canadian residents.
For the year ended December 31, 2019, the Company considers its foreign earnings to be indefinitely reinvested. These
earnings relate to ongoing operations and have been reinvested in active business operations. While, following the enactment of
the Tax Act, distributions from majority owned foreign affiliates are, generally, not subject to U.S. income tax, such
distributions may be subject to non-U.S. withholding taxes. A deferred tax liability related to such withholding taxes, and U.S.
taxes related to non-majority owned foreign investments have not been recorded.
The Tax Act implemented a new tax on foreign subsidiary income. The Company books Global Intangible Low-Taxed Income
("GILTI") on a current basis and does not book deferred taxes related to GILTI.
79
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.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
Balance, beginning of year
Increases (decreases) to tax positions related to prior periods
Increases to tax positions related to the current year
Balance, end of year
17. Employee Benefits
Year Ended December 31,
2019
2018
2017
$
$
$
89
19
5
113
$
$
327
(243)
5
89
$
120
91
116
327
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.
18. Quarterly Financial Information (Unaudited)
The following table contains quarterly financial data for the years ended December 31, 2019 and 2018 (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,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept. 30,
2018
Jun. 30,
2018
Mar. 31,
2018
Three Months Ended
Total revenues
$
105,483
$
99,276
$
92,199
$
86,978
$
82,640
$
78,164
$
73,392
$
69,760
Gross profit
17,734
17,445
14,713
15,032
14,205
13,744
12,353
11,064
Net income (loss)
Net income (loss) per share:
$
636
$
782
$
(1,931) $
(1,296) $
(275) $
1,205
$
(377) $
(1,480)
Basic
Diluted
$
$
0.02
0.02
$
$
0.02
0.02
$
$
(0.06) $
(0.04) $
(0.01) $
(0.06) $
(0.04) $
(0.01) $
0.04
0.03
$
$
(0.01) $
(0.01) $
(0.05)
(0.05)
Weighted-average common shares outstanding:
Basic
Diluted
34,876,438
34,876,782
34,610,709
34,292,367
33,716,975
33,129,416
30,721,037
30,246,585
36,354,620
36,399,136
34,610,709
34,292,367
33,716,975
36,385,360
30,721,037
30,246,585
80
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, 2019 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, 2019, 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. Ernst & Young has
independently assessed the effectiveness of the Company's internal control over financial reporting and its report is included
below.
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, 2019 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.
81
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Trupanion, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Trupanion, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Trupanion, Inc. (the Company) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated
statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a)
and our report dated February 13, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Seattle, Washington
February 13, 2020
82
Item 9B. Other Information
None.
83
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 2020 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 2020 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 2020 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 2020 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 2020 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.
84
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 following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference.
Exhibit Description
Form
File No.
Exhibit
Incorporated by Reference
Filed/
Furnished
Exhibit Filing Date Herewith
Restated Certificate of Incorporation of the
Registrant.
10-Q
001-36537
Certificate of Amendment to the Restated
Certificate of Incorporation of the Registrant.
8-K
001-36537
3.1
3.1
3.2
4.1
10.1
10.2
8/28/2014
6/3/2016
8/28/2014
6/16/2014
6/16/2014
6/16/2014
X
10-Q
001-36537
S-1
S-1
S-1
333-196814
333-196814
333-196814
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
Amended and Restated Bylaws of the
Registrant.
Description of Capital Stock
Form of Common Stock Certificate.
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
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.
Third Amendment to Consulting Agreement,
dated January 1, 2019 by and between the
Registrant and Howard Rubin.
Senior Credit Facility Loan and Security
Agreement, entered into as of December 16,
2016 between Pacific Western Bank, Western
Alliance Bank and the Registrant.
First Amendment to Senior Credit Facility
Loan and Security Agreement, dated March 31,
2017 between Pacific Western Bank, Western
Alliance Bank and the Registrant.
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
5/6/2016
10-K
001-36537
10.13
2/15/2017
10-Q
001-36537
10.2
5/3/2019
10-K
001-36537
10.15
2/15/2017
10-Q
001-36537
10.1
5/3/2017
85
10-Q
001-36537
10.1
11/3/2017
10-Q
001-36537
10.1
8/3/2018
10-Q
001-36537
10.2
11/9/2018
10-Q
001-36537
10.1
7/31/2019
8-K
001-36537
10.1
6/20/2018
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
10.20
2/14/2018
10-K
001-36537
10.19
2/14/2019
10.12
10.13
10.14
10.15
10.16
10.17†
10.18†
10.19†
10.20
10.21
10.22
10.23
Second Amendment to Senior Credit Facility
Loan and Security Agreement, dated
September 28, 2017 between Pacific Western
Bank, Western Alliance Bank and the
Registrant.
Third Amendment to Senior Credit Facility
Loan and Security Agreement, dated June 28,
2018, between Pacific Western Bank, Western
Alliance Bank and the Registrant.
Joinder to Loan and Security Agreement and
Amendment and Restated Revolving Note,
dated August 6, 2018, between Pacific Western
Bank, Western Alliance Bank, Trupanion
Managers USA, Inc. and Trupanion-APIC,
LLC.
Fourth Amendment to Senior Credit Facility
Loan and Security Agreement, dated April 29,
2019, between Pacific Western Bank, Western
Alliance Bank and the Registrant.
Real Estate Purchase and Sale Agreement,
dated June 18, 2018, between the Registrant
and Benaroya Capital Company, L.L.C.
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, 2018.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2019.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2020.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective July 1, 2020.
10.24+
Compensation Program for Non-Employee
Directors of Trupanion, Inc, as amended on
December 27, 2018.
10.25+
Compensation Clawback Policy, effective
February 11, 2019.
10-K
001-36537
10.20
2/14/2019
10-K
001-36537
10.21
2/14/2019
10.26+
On-Going Severance Policy for CEO and Key
Senior Leaders, effective February 11, 2019.
10-K
001-36537
10.22
2/14/2019
10.27+
Change of Control Policy for Select Officers
and Key Leaders effective February 11, 2019.
10-K
001-36537
10.23
2/14/2019
21.1
23.1
Subsidiaries of the Registrant.
Consent of independent registered public
accounting firm.
86
X
X
X
X
24.1
31.1
31.2
32.1*
32.2*
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 - the instance does
not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline
XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema
Document.
101.CAL Inline XBRL Taxonomy Extension Calculation
Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition
Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Labels
Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension
Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted in
Inline XBRL and contained in Exhibit 101)
X
X
X
X
X
X
X
X
X
X
X
X
+ Indicates a management contract or compensatory plan or arrangement.
† Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment under Rule 24b-2
promulgated under the Exchange Act. The omitted portions of this exhibit have been filed separately with the SEC.
* This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of
that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
Item 16. Form 10-K Summary
None.
87
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, 2020.
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.
88
Date: February 13, 2020
Date: February 13, 2020
Date: February 13, 2020
Date: February 13, 2020
Date: February 13, 2020
Date: February 13, 2020
Date: February 13, 2020
Date: February 13, 2020
Date: February 13, 2020
/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/ Jacqueline Davidson
Jacqueline Davidson
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/ Howard Rubin
Howard Rubin
Director
89
Schedule I - Condensed Financial Information of Registrant
Trupanion, Inc.
Condensed Statements of Operations and Comprehensive Loss
(Parent Company Only, in thousands)
Expenses:
Veterinary invoice expense
Other cost of revenue
Technology and development
General and administrative
Sales and marketing
Total expenses
Gain (loss) from investment in joint venture
Operating loss
Interest expense
Other (income) expense, net
Loss before equity in undistributed earnings of subsidiaries
Income tax benefit
Equity (loss) 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
Year Ended December 31,
2019
2018
2017
$
$
$
$
697
353
1,085
5,974
2,137
10,246
(205)
(10,451)
1,327
(4,156)
(7,622)
5,423
$
571
357
512
4,879
1,355
7,674
—
(7,674)
1,184
(2,557)
(6,301)
4,042
390
(1,809) $
1,332
(927) $
1,003
1,003
(806) $
(661)
(661)
(1,588) $
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)
90
Trupanion, Inc.
Condensed Balance Sheets
(Parent Company Only)
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Accounts and other receivables
Prepaid expenses and other assets
Total current assets
Restricted cash
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 current liabilities
Total current liabilities
Long-term debt
Deferred tax liabilities
Total liabilities
Stockholders’ equity:
Common stock: $0.00001 par value per share, 100,000,000 shares authorized at December 31,
2019 and December 31, 2018, 35,876,882 and 34,947,017 shares issued and outstanding at
December 31, 2019; 34,781,121 and 34,025,136 shares issued and outstanding at December 31,
2018
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31, 2019
and December 31, 2018, and 0 shares issued and outstanding at December 31, 2019 and December
31, 2018
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Treasury stock, at cost: 929,865 shares at December 31, 2019 and 755,985 shares at December 31,
2018
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
$
1,242
$
$
$
2,933
361
4,536
1,400
663
5,356
14,146
138,174
164,275
$
$
311
311
26,086
1,118
27,515
—
—
232,731
250
(85,520)
(10,701)
136,760
$
164,275
$
2,133
2,094
661
4,888
1,400
568
5,076
6,515
125,475
143,922
885
885
12,862
1,002
14,749
—
—
219,838
(753)
(83,711)
(6,201)
129,173
143,922
91
Trupanion, Inc.
Condensed Statements of Cash Flows
(Parent Company Only, in thousands)
Year Ended December 31,
2019
2018
2017
$
(1,809) $
(927) $
(1,503)
Operating activities
Net loss
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
(Income) 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 public offering of common stock, net of offering costs
Proceeds from exercise of stock options
Taxes paid related to net share settlement of equity awards
Proceeds from debt financing, net of financing fees
Repayments of debt financing
Other financing
Net cash provided by financing activities
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
Issuance of common stock for acquisition of corporate real estate
$
$
$
92
(390)
211
6,846
—
48
(601)
4,305
—
(728)
(11,931)
(7,019)
(19,678)
—
2,982
(1,667)
13,167
—
—
14,482
(891)
3,533
2,642
1,166
—
4,500
$
$
(1,332)
436
4,775
—
108
(97)
2,963
—
(164)
(67,884)
(4,237)
(72,285)
65,671
3,601
(1,839)
13,430
(10,000)
287
71,150
1,828
1,705
3,533
1,007
—
3,000
$
$
— $
9,640
$
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
(2,297)
4,001
1,705
333
471
—
—
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. Trupanion, Inc. received cash dividends
from a subsidiary of $3.9 million, $2.2 million and $2.7 million for the years ended December 31, 2019, 2018 and 2017,
respectively. These cash dividends were recorded within Trupanion, Inc.'s other income and were 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, 8, 10,
11, 13, and 16, respectively, to the Consolidated Financial Statements.
93
TRUPANION.COM