2020 Annual Report
THIS PAGE LEFT INTENTIONALLY BLANK To our shareholders
By the numbers, 2020 was a strong year for Trupanion.
Total revenue grew 31% over the prior year to $502 million.
Adjusted operating income grew 29% year-over-year to $57 million. We
deployed $44 million of these funds within our subscription business at an
estimated internal rate of return of 41%. Free cash flow, after pet acquisition
and strategic investments, was $14.1 million.
Table 1. Key Metrics
2014
2015
2016
2017
2018
2019
2020
Revenue
$115.9M
$147.0M
$188.2M
$242.7M
$304.0M
$383.9M
$502.0M
Year over Year
change
Discretionary Profit
(AOI)
Percentage of
revenue
Pet Acquisition
Spend
Development
Costs*
Internal Rate of
Return (from new
subscription pets)**
38%
27%
28%
29%
25%
26%
31%
$0.9M
$3.6M
$14.8M
$23.4M
$31.9M
$44.2M
$57.1
1%
2%
8%
10%
10%
12%
11%
$11.1M
$14.8M
$14.7M
$18.4M
$23.7M
$33.3M
$45.1M
N/A
N/A
N/A
N/A
N/A
N/A
$0.3M
N/A
N/A
33%
43%
46%
40%
41%
Free Cash Flow***
($16.4M)
($15.3M)
$3.1M
$6.5M
$8.3M
$10.8M
$14.1M
*Development expenses are costs related to product exploration and development that are
pre-revenue and historically have been insignificant. We view these activities as uses of our adjusted
operating income separate from pet acquisition spend.
**In 2019, we modified our calculation of IRR to reflect the per pet unit economics of our subscription
business. We have restated all prior periods in this table to reflect this change in approach. For the
calculation of our internal rate of return for 2020, please see page 6.
***2018 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.
In the fourth quarter, we significantly strengthened our balance sheet,
issuing an additional 3.6 million shares of our common stock to Aflac in a
strategic financing and alliance worth approximately $200 million under a
3-year lock-up.
01
Financial Metrics / Performance
Table 2. Financial Metrics/Performance 2012-2020
Year
Enrolled pets
Revenue
2012
2013
2014
2015
2016
2017
2018
2019
127,704
$55.5M
182,497
$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
2020
862,928
$502.0M
YoY revenue
growth
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)
50%
51%
38%
27%
28%
29%
25%
26%
31%
$3.0M
$4.3M
$0.9M
$3.6M
$14.8M
$23.4M
$6.7M
$8.4M
$11.1M
$14.8M
$14.7M
$18.4M
$31.9M
$23.7M
$44.2M
$33.3M
$57.1M
$45.1M
N/A
N/A
N/A
N/A
33%
43%
46%
40%
41%
$5.1M
($8.1M)
$7.9M
($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)
$297.8M
$(5.8M)
02
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0
Total Revenue by New vs. Existing Pets*
(dollars, in millions)
$141.5
Existing Pets New Pets
$105.5
$82.6
$66.6
$51.3
$40.2
$31.9
$24.0
$6.3
$10.7
$15.9
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
*Excludes miscellaneous revenue.
Quarterly Revenue by Policy Start Year Cohorts*
(dollars, in millions)
Other Business Pre-2010 2010 2011 2012 2013 2014
2015 2016 2017 2018 2019 2020
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
*Excludes miscellaneous revenue.
03
Business Segments
Today, the majority of Trupanion’s business and intrinsic value is derived
from our direct-to-consumer, monthly subscription business.
Of our $57 million of adjusted operating income in 2020, $54 million of this
was generated from our subscription business, which is a 29% increase
over 2019.
We ended the year with over 577,000 total enrolled subscription pets. During
the year, we earned subscription revenue of approximately $388 million.
Of this, we spent approximately $278 million paying veterinary invoices on
behalf of our members, $35 million providing 24/7 support and $20 million
on fixed expenses.
Our business segments as a percent of revenue in 2020:
Table 3. Business Segments as a Percent of Revenue 2020
Revenue
Less: Paying Veterinary Invoices
Less: Variable Expenses
Less: Fixed Expenses
= Adjusted Operating Margin
(AOM) or Income (AOI)
Subscription
Business Other Business
Total
Business
Subscription
Business Other Business Total Business
100%
72%
9%
5%
100%
100%
$387.7M
$114.3M
$502.0M
63%
29%
5%
70%
14%
5%
$277.9M
$72.1M
$350.0M
$35.4M
$33.1M
$68.5M
$20.4M
$6.0M
$26.4M
14%
3%
11%
$54.1M
$3.0M
$57.1M
04
Per Pet Economics
Below is our monthly per pet economics, or cash flow prior to new pet
acquisition, for our average subscription pet in 2020.
Table 4. Per Pet Monthly Economics 2020
Average Monthly Cost (ARPU)
$60.37
100.0%
2020
Minus paying veterinary invoices (COGS)
($43.26)
Minus variable expense (fast 24/7 service)
($5.51)
Contribution Profit
$11.60
Minus fixed expenses (G&A + IT)
($3.17)
Profit per pet per month
$8.43
Capital charge for money we are required to hold in cash or assets
($0.60)
Cash generated per month for the average pet
$7.83
71.7%
9.1%
19.2%
5.3%
13.9%
1.0%
13.0%
In total, we added approximately 166,000 new subscription pets in 2020—
year-over-year growth of 17%. Net pets, accounting for churn, increased
33% in the year.
Table 5. Pet Growth 2018-2020
Year
Gross New Pets
YoY Growth
Churn
Net New Pets
YoY Growth
2018
2019
2020
126,182
141,283
165,738
N/A
12%
17%
(67,095)
(78,027)
(81,807)
59,087
63,256
83,931
N/A
7%
33%
In 2020, we extended the average pet’s life with Trupanion to 78 months,
up from 70 months in 2019. Retention, as broken down by our three buckets:
Table 6. 2020 Churn By Rate Change
Active Pets at
Year End
Number of
Cancelled Pets
Distribution
Monthly
Churn
Monthly
Retention
YOY Change in
Monthly Retention
No rate change
(1ST year pets)
Rate Change < 20%
(Post 1ST year pets)
Rate Change > 20%
(Post 1ST year pets)
114,846
28,814
19.87%
2.29%
97.71%
382,021
40,567
66.10%
0.97%
99.03%
81,090
12,429
14.03%
1.40%
98.60%
Total
577,957
81,810
100.00%
1.29%
98.71%
0.41%
0.03%
0.01%
0.13%
05
When analyzing the three buckets, pets that are newly enrolled, and have
yet to experience a rate change, have the lowest level of monthly retention.
Therefore, if you were to accelerate the percentage of pets in that bucket,
the overall blended rate could go down even if the retention rates by
bucket remain the same.
Expansion in subscription adjusted operating income, coupled with
improved retention, drove a 25% year-over-year increase in lifetime value
of a pet, less fixed expenses in 2020.
Table 7. 2020 IRR Calculation
TTM Retention
98.71%
Year
Months
77.5
Months
Full Year Pet Aquisition
Cost (PAC)
247
Profit per Pet
per Month
0
6
$8
Profit per Pet
$7.83
Profit per Pet
$47
1
12
$8
$94
2
12
3
12
$8
$8
$94
$94
4
12
$8
$94
5
6
12
11.5
77.5
$8
$8
$94
$90
607
Capital Charge
1%
FY ARPU
$60.37
PAC
-$247
-$200
$94
$94
$94
$94
$94
IRR
$90
41%
Growth in lifetime value of a pet increases our allowable pet acquisition
spend (PAC), while still operating within our targeted internal rate of return.
Expansion in allowable PAC increases our ability to successfully execute our
growth plans. Consider the following:
Table 8. 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
Lead* Convert*
Retention*
Retention
$631
$727
$710
$753
$899
$341
$318
$261
$230
$246
$290
$123
$409
$152
$449
$164
$523
$212
$653
$247
85%
75%
60%
50%
50%
15%
25%
40%
50%
46%
0%
0%
0%
0%
4%
98.60%
98.63%
98.60%
98.58%
98.71%
Year
2016
2017
2018
2019
2020
*Historically, we have not tracked the attribution between our lead generation, conversion and
retention costs. Therefore, the percentages in the table above are internal management estimates.
06
Veterinary Metrics
We ended 2020 with 152 territory partners and their associates in the
field “visiting” an estimated 17,200 hospitals in North America.
Table 9. Veterinary Clinic Metrics
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
Actual average
number of new
pets per active
hospital per month
Number of
partnered clinics
with software &
account manager
34
40
58
84
105
107
123
130
152
15,000
16,200
15,400
19,000
21,300
19,800
20,200
21,600
17,200
262,000
324,000
404,000
490,000
577,000
662,000
751,000
852,000
909,000
5,034
5,531
6,098
7,359
7,875
8,242
9,279
10,315
11,517
0.918
1.008
1.053
1.093
1.066
1.063
1.133
1.141
1.199
n/a
n/a
n/a
n/a
n/a
n/a
2,908
4,426
5,220
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
*Per the data available, this represents hospitals that have been visited at least once during the year.
Given we don’t have perfect tracking of visits, this is the definition used to approximate visits every
60-90 days.
In a year where care moved curb-side and in-person visits were limited,
overall engagement was solid, but compared to the prior year, the growth
in face-to-face visits declined.
We averaged 11,517 active hospitals during the year—a number that has
since continued to climb. As a reminder, we define active hospitals as those
07
that have had at least one pet enroll with Trupanion in the prior three month
period. We were able to deliver this 12% increase in active hospitals, while
increasing the number of pets that enrolled per active hospital to 1.2, up
from 1.1 in 2019.
Active Hospitals
New Pets per Hospital Per Month
14000
12000
10000
8000
6000
4000
2000
0
2
1
0
2
/
1
/
3
3
1
0
2
/
1
/
2
1
5
1
0
2
/
1
/
9
7
1
0
2
/
1
/
6
9
1
0
2
/
1
/
3
0
2
0
2
/
1
3
/
2
1
1.2
1.15
1.1
1.05
1
0.95
0.9
0.85
0.80
2012 2013 2014 2015 2016 2017 2018 2019 2020
We ended the year with our software and a partnered account manager
in approximately 5,200 hospitals, up from approximately 4,400 at the end of
2019. We had hoped to make more progress with our software deployments
in 2020. COVID presented a challenge to doing so.
Increasing the deployment and utilization of our software is important. It
allows us to pay hospitals directly, and in an automated way. It’s also an
important part of our customer value proposition.
Members who experience the brand and our product this way are more
likely to add-a-pet or refer-a-friend. In 2020, 0.82% of our subscription
book of business was from our add-a-pet, refer-a-friend channel, up from
0.73% in 2019.
The Importance of Key Metrics
Higher ARPU, more active hospitals, improved same-store-sales, expansion
in adjusted operating margin, reduced churn, greater member referrals
and new pets added are the metrics that when we outperform relative to
our expectations, drive outsized growth in intrinsic value.
08
Team
Trupanion’s culture is unique.
Some might call it a moat—I do. Maintaining
our culture as we grow will be important
and is an area I am personally focused on.
We have several feedback mechanisms at
Trupanion, but one of my favorites is what
I’ve historically called the Stupid Box (now
re-branded TruSolutions). The Stupid Box is
available to all team members in order to
identify policies, actions or behaviors in our
organization that are, well, stupid. It’s also
one way I maintain a pulse on our culture.
I personally review and assign an owner for
each and every submission.
Earlier this year, the Stupid Box received a
submission from a new team member, Cami,
on one of my favorite topics—Nirvana. I’ll let
you read her passage:
“After hearing about Trupanion’s usage of
“nirvana” in today’s session, I wondered if
anyone has suggested that this term and
the context in which this term is being used
may be considered culturally insensitive? I
understand the casual usage of the term,
as well as the pop cultural reference to
09
the Seattle-born band, Nirvana. However, I
feel that it must be recognized as a more
meaningful term for some. As a Buddhist
myself, I have to admit that I was a little
taken aback when I first received emails
about “reaching Nir vana”. The usage of
“Nirvana” in this context does not necessarily
offend me; rather, it indicates a cultural
ignorance or disregard. I know I am new to
the company, but it is precisely because of
the transparency and welcoming attitudes
I have encountered during my first couple
of weeks that I feel comfortable speaking
about this. I believe changing the term
“Ni r vana” will create a more inclusive
atmosphere for employees and prospective
employees. If I were told about “Nirvana”
during my inter viewing process, I think I
would’ve thought of Trupanion in a more
negative light. Thank you.”
Following her feedback, I had the chance
to talk with Cami and understand her point
of view. Cami’s submission was courageous,
her perspective valuable and the take-
away clear. Our term “Nir vana” had to
change. From here on, when you hear me
refer to the state of self-sustaining growth,
in which members adding pets or referring
friends is offsetting churn, it will be under our
newly coined term, “TruTopia”. Thank you
Cami.
Eric. Eric grew up in Texas, is a father of two,
pet guy, lawyer and the Mayor of Dallas.
We appointed Eric because of his character
and life experiences. We interviewed Eric
because of a strong recommendation and
because he increased our diversity.
I’ve always believed that diversity makes
Trupanion stronger, more effective. Simply
put, diversity provides better outcomes for all
our constituents, pet owners, veterinarians
and thei r co -wo r kers, Tr upanion team
m e m b e r s , s t r a t e g i c p a r t n e r s a n d
shareholders. Diversity also provides the
oppor tunity to learn from one another.
Cami’s submission is a perfect example
of that.
In some areas of diversity we’ve done well,
and in other areas where we’ve fallen short,
we’re making changes. Currently, Trupanion
is focused on ensuring gender and racial
diversity. This will be a goal in every team
within the organization and it begins with
our board of directors.
First, I’ll give you some history of how the
board was comprised. At the beginning
of 2020, we had 8 board members, myself,
Dan, Murray, Hays, Howard, Mike, Robin and
Jackie. 6 males, 2 females, all Caucasian.
I am on the board because I founded the
company. Dan, Murray, Mike & Hays all
led investments to finance Trupanion in
2007, which enabled our expansion from
Canada to the United States. At this point, I
acknowledge that while important, diversity
was not at the top of my priority list. Howard
joined the board in connection with his
ser vice as Trupanion’s Chief Operating
Officer. Our post IPO board members were
Robin and Jackie, adding much needed
gender diversity.
Over the past year, as we were looking
to add a new Board member, I chose to
inter view candidates only if they would
increase our diversity. Recently we added
As board members retire, we are being
deliberate in appointing new non-Executive
board members who add to our diversity.
My goal, that I would be personally proud
of, is to achieve at least 1/3 representation
across race, gender and age (including
over 60 & under 50) among independent
board members.
This means we will not advance board
candidates unless they meet the diversity
requirements. At the same time, we will
o n l y a d d b o a rd m e m b e r s w h o m e et
our standards based on their individual
character.
More broadly, diversity should be a focus in
teams across the company. All managers
need to access the diversity of their team
and build upon it with new hires. This needs
to be deliberate and thoughtful but also
practical.
Once a team has racial and gender diversity,
we want to continue our never ending goal
of becoming diverse in even more ways.
The dimensions of diversity are vast. Age,
nationality, physical ability, languages
spoken — we want ou r o rgani zation to
increasingly represent all these facets
and more!
Trupanion’s culture prioritizes individuality
a n d i n c l u s i v it y. We wa nt to fos te r a n
environment where all voices are heard,
and where team members feel empowered
to bring their truest self to work. Our entry
way hall holds the quote by Oscar Wilde,
“Be yourself, everyone else is taken.”
Once an individual is on the Trupanion
team, their success should be 100% based
10
on their achievements and contributions
at Tr upan ion. E x i sti ng team mem be r s
should never be promoted because of their
diversity. Nobody wants to second guess if
the advancements of one’s career are due
to their gender or skin color.
E q u it y i s i m po r ta nt. O u r po l i ci es a nd
prog rams were designed to ensure all
team members have the same benefits,
access to resources, and opportunities to
build meaningful careers at Trupanion.
This approach extends throughout the
way we work together; for example, each
team member has the same size desk. We
want every employee to think and act like
an owner of the Company. To build this
alignment, each team member is granted
equity in Trupanion at the time of hire.
Trupanion is a mission driven organization,
and our team of over 1,100 individuals (and
growing!) unifies around our collective goal
of helping pets. No year is a better example
of that than 2020.
It is hard to succinctly explain how I feel
about the team and what we accomplished
together in 2020. During one board meeting,
I found myself literally brought to tears
when describing the efforts of the team.
At the time, I had no words to describe my
gratitude. In fact, there is no word in the
English language that succinctly captures
this sentiment. Fortunately, there is one in
Japanese: Kanrui.
As we cross over the one year mark— in
which we transitioned all team members
to a remote work environment—I believe
that our culture is healthy and vibrant. Team
member retention is strong, nearly 15% of
team members advanced their careers
inter nally, and we increased the level
and quality of our communications. I look
forward to seeing what we can accomplish
together in the days, months and years
ahead.
11
Intrinsic Value &
Per Share Performance
In 2020, we calculated an increase in Trupanion’s estimated intrinsic
value per share of 88% before stock grants.
As a reminder, our calculation of intrinsic
value is based on our discounted cash
flow model.
Our intrinsic value model is informed by
historical metrics—metrics we work hard to
improve upon. Higher ARPU, more active
hospita l s, i m p roved same - sto re - sa l es,
expansion in adjusted operating margin,
reduced churn, greater member referrals
a nd new pet s added a re the m et r ics
that when we outperform relative to our
expectations, dr ive outsized g row th in
intrinsic value.
Each year, in addition to updating our inputs
for another year of performance, we also
evaluate other assumptions in our model
such as the discount rate. For example, as
we become a larger, more dependable
company, we believe a lower risk premium
is appropriate, resulting in a slight decrease
to our discount rate.
T h i s c h a n g e, a l o n g w i t h o u r s t r o n g
performance in 2020, resulted in the 88%
increase in our estimated intrinsic value per
share stated above.
In addition to highlighting what metrics
have a material impact on the value of
our company and informing how we run
the business and make decisions, ou r
intr insic value model helps guide how
we compensate our team — with some
adjustments discussed below.
Although our discounted cash flow model
evolves over time, with the goal of becoming
more and more accurate, for purposes
of team member compensation and the
calculation of our overall stock pool, we
apply an apples to apples comparison.
Inputs like discount rates, that can go up or
down based on interest rates and risk profile,
and are outside of the control of employees,
a re not factored in when deter mining
compensation.
Under this approach, which isolates proven
performance within the control of team
members, we calculated an estimated
increase to intrinsic value per share of 29%
in 2020. Fur ther, when determining the
overall stock pool, we use the two-year
12
compounded annual growth rate (CAGR) in
calculated intrinsic value per share, rather
than a single year, to better reflect long-
term sustainable performance. For the 2020
performance year, the two-year CAGR of
our calculated intrinsic value per share was
31%.
In accordance with our Intrinsic Value
Incentive Plan, a portion of this intrinsic
value growth is shared with team members.
Please see my 2016 shareholder letter for
additional details.
In 2020, our fully diluted share count, which
includes options and unvested restricted
stock units, increased by 4,406,975 shares to
42,358,814. Of this increased share count,
app rox imately 8 0 % was based on the
capital raise with Aflac, and the remaining
20% balance was shared with the team
based on our results.
Given the calculated increase in intrinsic
value of 31% (based on a two-year CAGR
for compensation purposes), we were able
to share 2.6% of the increase with the team,
with the remaining benefitting shareholders.
In order to share 2.6% with the team, the
total size of the grant pool was 850,608
sha res. 202,668 sha res were allocated
d u r i n g t h e ye a r fo r n ew h i re g ra nt s ,
individual performance awards and board
compensation, leaving 647,940 shares that
were issued in 2021 for our performance
grant program related to the 2020 year.
50,350 shares within our performance pool
were set aside as a charitable contribution
to Might yVet.org, which is a non -profit
founded to support veterinary professionals
and aligns closely with our mission.
Our key financial metrics on a per share
basis:
Table 10. Key Financial Metrics Per Share
Total share count
plus options &
warrants granted*
Revenue
per share
YoY
growth
Adjusted
operating
income per
share
Cash, short-term
investments, our
building assets,
minus debt per share
YoY
growth
YoY
growth
Earnings
(loss) per
share**
22,467,205
$2.47
24,889,316
$3.37
33,813,736
$3.43
34,138,237
$4.31
34,879,610
$5.40
35,444,460
$6.85
37,862,667
$8.03
37,951,839
$10.12
42,358,814
$11.85
53%
36%
2%
26%
25%
27%
17%
26%
17%
$0.13
$0.17
-7%
31%
$0.23
-30%
($9.76)
$0.32
39%
($6.23)
$0.03
-82%
$1.79
459%
($1.64)
$0.11
267%
$1.27
-29%
($0.62)
$0.42
282%
$0.66
$0.85
$1.16
$1.35
57%
28%
37%
16%
$1.40
$1.53
10%
9%
($0.24)
($0.05)
$3.56
133%
($0.03)
$3.67
$7.03
3%
91%
($0.05)
($0.16)
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
*Share 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. In addition, total
outstanding shares increased by 3,636,364 shares in 2020 due to Aflac’s common stock purchase.
**Loss per share is calculated using the GAAP basic weighted-average shares at year-end.
13
Looking Ahead
Over the last 20 years, we have worked hard to build the foundation
of our company and bring it to operating scale.
We’ve forged our own path, and we’ve led the industry.
2020 marked the completion of our 5 year plan, the vision for which was
laid out in my 2014 Shareholder Letter. For those interested in assessing our
performance, I encourage you to go back and re-read the 2014 Shareholder
Letter. Every year since then, I’ve attached the 2014 Shareholder Letter to
that of the current years’ letter. Beginning 2021 and through 2025, you can
expect I’ll do the same with our 2020 letter.
2021 marks the start of our next 5 years—or as we at Trupanion call it—our
60 month plan.
Included herein are the contents of our 60-month plan. For competitive
reasons, select information has been edited out, but I’ve left much of the
document in its original form. Unlike prior shareholder letters, the content
of our 60-month plan was not written solely by me, nor was it originally
intended for an external audience. Rather, it was written by my team,
led by Tricia Plouf and Margi Tooth, who were recently promoted to Co-
Presidents, and will be closely overseeing the execution of the plan—with
team members as the intended audience, to share our vision of where we
are headed over the next 60 months.
In totality, our 60-month plan describes how we intend to increase the
value proposition for our members while dramatically increasing our service
levels over the next five years. It describes how we plan to add distribution
channels, and expand on our partnerships with State Farm and Aflac, and
access the 1 million puppies and kittens that are visiting the veterinarian for
the first time every year.
14
Our 60-month plan details how we plan to expand our insurance product
lines to include PHI Direct and Furkin (our low and medium ARPU products,
respectively), expand our geographies by entering Japan and Europe, as
well as add a new monthly subscription pet food where we hope to verify
our hypothesis that pets eating a healthy diet in the right amount of calories
will be healthier.
In addition to all of the above, we outline how we are going to organize our
existing “Trupanion” subscription business into distinct regions, how we will
continue to drive high rates of growth in the breeder channel; and how we
are continuing to harness the benefits of social media and other direct-to-
consumer marketing channels.
If we achieve the goals in our 60-month plan, we’ll grow revenue to over
$1.5 billion, reach over 3.5 million pets and deliver growth in intrinsic value
of over 25% per year. Doing so will not be easy—it will require a lot of hard
work, decent execution and perhaps a bit of luck. But as one shareholder
recently observed, at Trupanion we just work harder than most. We do not
shy away from tough goals!
In totality, our 60-month plan sets the stage for an exciting growth story at
Trupanion. I hope that in sharing this 60-month plan, you’ll be as excited as
we are about where we are headed.
Kuyashii,
DARRYL RAWLINGS
Founder & Chief Executive Officer
15
THIS PAGE LEFT INTENTIONALLY BLANK 2021-2025
Our 60-Month Strategic Plan
OUR MISSION
To help loving, responsible pet owners budget and care for their pets.
What you will read in this document is our plan for the next 5 years for Trupanion.
It follows a very successful 20 years, during which time a significant effort by
the team enabled us to achieve operational scale—growing to a size where
we can operate efficiently. We’ve done a good job in this respect—thank you!
That work has laid the foundation for us to take Trupanion forward and given
us more opportunities than ever before. To reflect this, we’ve refreshed our
mission statement.
What has not changed since Day 1 is our singular focus on helping pets. We
remain committed to this, and we hope that as you read this document and
see what Trupanion aspires to become by the end of 2025, you will be as excited
and motivated as we are about what lies ahead.
Today Trupanion is a monthly subscription business grown primarily through the sale of our core
product, “Trupanion,” which is sold through the veterinary channel. Our strength to date has been
our collective ability to create, market, sell and service an intangible product that does what it says,
both from the pet owner and veterinary perspective.
Trupanion Inc. (the company consisting of all our brands and entities) is a high-growth company, with
revenue consistently increasing around 25% each year. As a team we have continued to be nimble
and determined—it’s this agility from our people that will set us up well for the future.
Between now and 2025, we will redefine many of our working practices. We will need to create new
teams and new processes. We will learn new techniques and rise to new challenges. We will grow,
evolve and reorganize. We will look very different in 5 years!
Our way of working and areas of focus that we know today will evolve to take on different meanings
or play new and different roles in the company growth. This exciting phase will present more
opportunities than ever before and we invite you, our team, to immerse yourself and make the most
of this thriving company that we’ve created together. We will only be successful if our entire team is
driving towards the same goal: achieving our mission.
For a seed to achieve its greatest expression, it must come completely undone.
The shell cracks, its insides come out and everything changes. To someone who doesn’t
understand growth, it would look like complete destruction.
–CYNTHIA OCCELLI,
Author, Mentor, & Entrepreneur
By 2025 we plan to create new growth initiatives to help us expand the reach of our core Trupanion
product globally and begin the growth of new pet care brands in the animal health arena. Each of
these initiatives will be underpinned by world-class subject matter experts supported with technology
that will enable more effective solutions across the business. Combining operational excellence and
growth-focused business units will enable us to help millions of pets and pet owners.
At all times we shall remain committed to our mission, our people, and our stakeholders; pets,
pet owners, veterinarians, team members, territory partners and associates, strategic partners
and investors.
We also remain dedicated to being bold, being nimble and being determined. We look forward to
building our next 5 years together.
KUYASHII
The Japanese concept of being fueled by the doubting of others.
01
THE BOTTOM LINE—TARGETED GROWTH RATE & INCREASE IN INTRINSIC VALUE
Our 5-year goal is to achieve a consistent annual revenue growth rate of 25% or greater. This would
equate to annual revenue for Trupanion Inc. of $1.5 billion by December 31ST, 2025. This revenue
growth will also enable us achieve another goal: to increase our intrinsic value1 per share by
approximately 25% each year.
To achieve a collective annual growth rate of 25% we will target higher growth rates for each
individual business segment–building in some room for error. This will help give us a higher degree
of confidence that we can consistently grow our revenue at a rate of 25% or more each year. While
some areas, such as the core Trupanion product in North America, may be seeking a 25% growth
rate, others that are smaller or just beginning, such as Worksite Benefits or PHI Direct, will likely have a
faster rate of growth. In aggregate, if every business unit achieves their goal, our overall growth may
be much larger than 25%. This “building block” approach allows us to be more certain of success as
it increases our likelihood of achieving our collective goal.
Nothing, however, will be more important than the combined effort of our people—the cement
between our building blocks. Our strength to date has been our team and as we look to nurture,
grow and add to Team Trupanion, we feel confident that we are creating an organization built
for brilliance.
OUR 6 BUILDING BLOCKS
These building blocks are our planned areas of growth over the next 5 years. Some of these build
on our current business model and expertise, and others leverage the same skills and knowledge to
expand into new and exciting opportunities. Now that we have reached operational scale, not only
can we continue to hone our existing member experience, we can also look to add more ways to
support loving, responsible, and informed pet owners and their pets, for life. Here’s the list we plan
to focus on:
1. INSURANCE
• Grow our core “Trupanion” product in North America
2. INSURANCE
• Introduce PHI Direct and Furkin to North America. These are new pet medical insurance
products designed to be offered primarily online. They will offer the same high value
proposition as the Trupanion product but at different price points (we call these Low and
Medium ARPU products)
3. INSURANCE
• Expand our sales of pet medical insurance to countries beyond the US, Canada and
Australia—both with and potentially without the Trupanion brand
1
Intrinsic Value is the value an informed and educated individual or entity would typically pay for a company under stable market
conditions. We are always looking to increase this at a rate faster than 20%.
02
4. FOOD
• Introduce Landspath (a high-quality monthly subscription wellness diet, sold exclusively
via veterinarians) in North America to try to prove our hypothesis that feeding pets a high
quality diet, in what their veterinarian believes is the appropriate number of calories, will
lead to healthier lives and therefore justify lower premiums for their medical insurance
5. PET CARE
• Introduce a GPS-based device that is perpetually powered to immediately locate lost
pets—a global opportunity
6. TECHNOLOGY
• Enhance and expand our technology solutions, including through acquisitions, to
dramatically expand our technology capabilities. As we become experts in technology
in the pet space, we may also enter into a technology re-sale space (global opportunity).
THESE BUILDING BLOCKS ARE NOT LISTED IN ORDER OF PRIORITY–EACH BLOCK WILL HAVE OWNERS
DEDICATED TO GROWING THEIR BUSINESS UNITS AND AS SUCH, EACH ONE SHOULD BE CONSIDERED
AS IMPORTANT AS THE NEXT. AN IN-DEPTH DETAIL OF EACH BLOCK FOLLOWS.
BUILDING BLOCK 1—INSURANCE-GROW OUR NORTH AMERICAN TRUPANION PRODUCT 2
We believe that any informed, responsible pet owner would want to buy Trupanion for their pet. Being
well-informed removes the uncertainty and confusion around product selection, and Trupanion
ultimately becomes the obvious choice for those that are knowledgeable. Our flagship product is
widely acknowledged as having the best and the broadest coverage available and it is our goal to
grow the adoption of this comprehensive product and the associated revenue by 25% each year
from 2021 to 2025.
Historically, the entire company has worked together to support the growth of this product. This has
been an effective way of working over the past 20 years, however our size and scale mean that
it is no longer sustainable to take such a broad market approach and expect to be as effective,
especially as we start to introduce new products and channels into our eco-system.
Therefore, during our next 5-year chapter, we will adjust our organizational structure to provide a
dedicated focus on all markets our core and much loved Trupanion-branded product is present in.
We will build upon the framework of the Market Leader model to create alignment, ownership and
depth of regional understanding to drive the best experience for all stakeholders. The Market Leader
role will evolve to become a General Manager. By 2025 we expect to have up to 5 North American
markets, each with a General Manager.
These General Managers will be responsible for the growth in their geography in support of the
Territory Partners and their Associates. They will work across business units and partner with support
2
In 2020, Trupanion is our core product. It is the one product the business hinges
around and it is where we are all focused. By 2025, this will dramatically change
as other business areas around us grow and expand.
03
teams to drive lead growth, conversion improvements and achieve TruTopia. They will own the
expansion and reach of the Trupanion product, Landspath (see page 11) and, most critically,
support Territory Partners in maintaining close relationships within the veterinary community. These
relationships are essential to our success and have created immense barriers for our competitors to
overcome—sustaining them will be critical to achieving our growth plans.
Key aspects of our core Trupanion product strategy remain essential within the General Manager
construct. We must: expand our reach to every new pet owner (lead growth), find new ways to
educate and sell Trupanion (convert) and deliver on an exceptional member experience (keep).
Over the next 5 years we will strive to maintain a state of TruTopia—where the number of pets
enrolling through friend recommendation or pets added by existing members offsets the number of
pets that are cancelled each month.
To successfully achieve these goals in North America, we will need to (A) strengthen our moats3, i.e.
things we have or do that would be really hard for any competitor to have or do as well as us, (B)
increase the distribution of the Trupanion brand, and associated brands, (C) increase the rate at
which we convert these pet owners and, (D) continue to enhance our member experience. We’ll
explore these goals over the following pages before picking back up with our building blocks.
A) Strengthening our moats
Trupanion moat—low-cost operator with high value proposition. To be clear, “low-cost” certainly
does not mean low quality or lowest price. Being a low-cost operator means that we are operating
with efficiency, enabling us to provide exceptional service at a cost that helps us to enhance our
competitive advantage by being able to give more back to our members. Our goal by 2025 is to pay
over 90% of veterinary invoices within 5 minutes. In 2020, we paid approximately 24% in 5 minutes.
This exceptional member and hospital experience will primarily be delivered through our software.
We also plan to significantly increase the rate of claims automation for those hospitals that, for reasons
outside of our control, do not or cannot have access to our software. In 2020 our automation rates
are around 18% of all claims, by 2025 we are targeting 80% of claims handled through automation.
Automation, which importantly includes our software and non-software claims, allows us to pay
invoices faster without sacrificing accuracy due to our post-claim audit process by our claims team.
Automation will mean we are spending less per claim overall to deliver outstanding service. Today,
we target spending 71% of our members’ monthly cost on paying invoices. In addition, we spend 9%
of members’ monthly costs to offer our high-quality service.
Our goal is to dramatically increase our service levels and to do so, we will leverage our automation
and software patents. Our investment in technology will ensure we can continue to support our claims
team members and allow them the time to focus on more complex claims, coverage summaries,
and supporting our new products. We are committed to providing this group with the tools they
need to carry out exciting, technical work—all of which will improve our member experience.4
3
4
Trupanion Moat: A feature of our business that would take a competitor over 3 – 5 years to replicate. They require deep sustained level
of effort and time to build and maintain and often can hinge on deep relationships.
Note that lowering our average cost per claim by increasing claims automation does not mean we will be eliminating our claims
department or reducing the size of the team. In many cases it will enable current processes to be more efficient and also allow team
members to have more time to focus on the more complex work as well as coverage summaries and new products.
04
When we use our patented software and claims automation to pay directly, our total cost to process
a claim is reduced. This reduction in cost will allow us to pass this money back to the pet owner in the
form of an even greater value proposition.
By 2025 we want to improve our total claims ratio (claims payments + cost to process a claim) for all
members from 71 to 72%.
SOFTWARE
Our patented software is a key part of our low-cost operator moat. Over the past five years we have
been learning how to streamline installing our software in hospitals, or to have hospitals frequently
use the software after installation. We realize it’s not easy.
At the start of 2021 we anticipate that close to 6,000 hospitals will have our software installed—a
little under 25% of the total hospital population. These 6,000 hospitals provide a good foundation
for the next five years as the benefits of direct and immediate payment become known to more
pet owners. By the end of 2025, we expect the penetration rate of our software to be over 90%. Our
approach to generating demand for our software will need to adjust to reach this milestone; here’s
how we plan to achieve this:
We will increase our investment in the software to fund a product redesign—both in terms of look
and feel as well as functionality. Our software will become the “bee’s knees” of hospital software
providing real-time opportunities to engage with the hospital team to create an increase in utilization.
We will launch a robust awareness campaign with our existing member base. Now that we have
approximately 600,000 pets enrolled, we will connect with our hundreds of thousands of pet owners,
to develop awareness of our unique ability to pay their invoice for them. We plan to create ways for
our members to initiate conversations with their hospitals about direct payment. We believe many of
our members do not even know this service exists and we see this as a huge opportunity to grow our
software penetration while increasing the number of members and veterinary teams experiencing
the benefits.
In meeting this goal we anticipate it will result in us achieving a 99.00% member retention rate, which
is a critical element for achieving TruTopia with our core Trupanion product.
TRUPANION MOAT—PRICING OF OUR SUB-CATEGORIES
As with any moat, it takes hard work and sustainable effort to build and maintain it (if it was easy, it
wouldn’t be a moat)! A core tenet of our business model is our pricing promise to treat all pet owners
fairly. This means the owner of a retriever in Seattle should pay a different amount AND receive the
same value as the owner of a poodle in Phoenix. No matter the species, breed, age or location,
the value returned to our members when they make a claim should be consistent if their pet is
“average”. It’s important to note that our intangible product provides value by helping a pet owner
budget and care for their pet in the event it’s needed. The amount we return is the average amount
we spend paying our members’ invoices, currently 71% and targeting 72%.
Said another way, imagine that for every $1 we receive, we spend 71 cents (targeting 72 cents)
to pay invoices. Every time we can improve our efficiency, more of that $1 can be spent paying
invoices, which increases the value to the member. The better the experience, the happier
our members.
05
The more accurately we can price, the more we can deliver on this pricing promise. The better we
can do this up-front (rather than having to make dramatic changes later) the more likely members
will remain members.
We are proud that we already have more focus and talented,
dedicated actuaries than any of our competitors.
We believe that rate increases should reflect the
trend in a given geographical area where the
cost of care and overall inflation increases
between 5-8% each year. We have learned
that when our members experience rate
increases over 20%, retention is lower.
We know retention reduces further if
a member receives 20+% increases
year after year. To provide exceptional
member experience we will smooth out
our rate adjustments with an enhanced
approach to pricing. To do this we will
become more focused on the expansion
of our neighborhood pricing approach, an
approach star ted with the launch of our 2.0
product in Florida.
Neighbo r hood p r icing ensu res we have bet ter p r icing data to develop rates that a re
appropriate—ultimately helping to avoid large swings in pricing due to changes in the data that
could have been anticipated. We are able to do this more effectively due to data that we can pull
from our software, through information shared through our partnerships with practice management
system providers and analysis of cost trends of pet owners in general, not just Trupanion members.
Our goal between 2021 and 2025 is for our members to experience rate increases in-line with local
inflation in their neighborhood. This will likely be an increase between 5-12% each year as we learn
to adjust and sharpen our approach. In the event that we need to increase rates more, this will be
as a result of changes shown in our data that are driven by the market (e.g., significant increase in
cost of care in a neighborhood). In any situation, our pricing and member-facing teams will partner
to craft deeper communication and training moments to help support and guide our members and
partners through proactive rate adjustment conversations.
Having more data sources allows us to target 98% pricing accuracy across our top 5,000 sub-
categories by 2025 (up from 50% across our top 100 subcategories in 2020).
B) Increasing Our Reach to New Pet Owners—Our distribution strategy
One great benefit to having built the Trupanion brand into what it is today is that we attract the
interest of potential new strategic partners and distribution channels. These companies want to be
involved in the growth of the category, and they recognize the value of our brand and our expertise.
Over the next five years we will have big opportunities to dramatically increase the number of pet
06
owners learning about Trupanion as a brand, the core Trupanion product, and in some instances
the assurance of quality the Trupanion brand represents. These opportunities include entering into
new or enhancing existing partnerships with other industry leaders to expand the distribution of the
Trupanion brand.
Between now and 2025, we will look to significantly increase the infrastructure and support dedicated
to growing our channels and as such will look to build out a new area of our business related entirely
to maximizing distribution. Each of our distribution channels will be operated as a business unit
with a clearly defined owner—resourced with dedicated teams—focused on delivering the best
returns. This ownership will be critical to success. The owners will operate as partners to the General
Managers, creating new channels of distribution for each market to support mutual growth. They
will also be responsible for driving growth through partner brands, such as Aflac, helping to reinforce
the assurance the Trupanion brand presents when in partnership with others.
The biggest distribution opportunities for new or incremental lead growth can be summarized
as follows:
E-LEADS
Trupanion has exclusive relationships with IDEXX and Covetrus, the owners of over 75% of practice
information management systems (PIMS) used in North America today. PIMS are important for us
because they can provide us with access to the new pet owners who make their first visit with their
pet to a hospital each month. This is approximately one million people—potentially one million
leads per month! We refer to these as e-leads.
A core part of our 5-year strategy is to understand how to operationalize the e-leads channel to
reach this group of one million new pet owners every month.
We are confident that the combination of our current partnerships—and the opportunity of new
partnerships ahead of us—will help us to maximize our reach to new pet owners during the next
5 years.
STATE FARM
We are proud of our exclusive relationship with America’s largest insurance brand, State Farm. With
access to over 18 million homes—and likely 9+ million pet owners—we have huge opportunity for
growth. We have started to make progress in 2020 with the launch of Trupanion across the State
Farm website, yet still have to develop a robust agent engagement program to fully appreciate the
value of this huge US brand.
With such a large addressable market, we feel this target is distinctly achievable with partnership
buy-in. To do this, we will need to enhance our resourcing and support of this major potential channel
in 2021. As with all major distribution channels, we will be scaling our support and working cross-
functionally with subject matter experts to provide the necessary resources in terms of infrastructure
to excite State Farm agents and grow this business unit to meet its potential.
07
BREEDER
As our fastest-growing channel over the last 5 years, our goal for the next 5 will be to continue to
expand our reach across the breeder community. Breeder has proven to be a fantastic channel for
the Trupanion product with strong lead growth, the highest conversion rates and exceptional lifetime
value. These three components indicate a very strong future for the breeder channel.
WORKSITE BENEFITS (FORMERLY CORPORATE BENEFITS)—AFLAC—POWERED BY TRUPANION
This is a distribution channel that enables employers to offer pet medical insurance to their team
members as a benefit. We believe that Worksite Benefits can exceed $100m in revenue by 2025.
In 2020, we have seen solid growth generated by our internal team, but to be successful long-term,
we believe that strategic partnerships in the worksite space are essential. With that in mind, we are
very excited to be beginning our relationship with the leading provider of worksite benefits, Aflac.
As a key shareholder in Trupanion, Aflac will be a committed partner with full alignment, eager to
support the growth of medical insurance for pets as a Worksite Benefit.
We will look to Aflac to be our catalyst for growth in this space. We will need to think differently
and will leverage their extensive knowledge and partnerships with all leading benefit platforms
to help redefine our product offering to take advantage of a market currently dominated by our
competitors. We don’t yet know the details around how this will look but we do know that our
Worksite Benefit product, starting in 2021, will be very different. It will be one of the first products to be
launched to market as “Powered by Trupanion”. We’re excited to launch into a several-year growth
plan incorporating Aflac’s extensive broker network, partnering with their new direct to consumer
brand and ultimately, joining forces with the 20,000 strong ‘Aflac Army’ of agents.
We are confident that with Aflac alongside us, we can increase this emerging channel to achieve
$100m in revenue by 2025.
SOCIAL MEDIA
Facebook and other digital platforms are shifting from conversion tools to fast becoming lead
generation channels. These channels have the ability to target responsible, loving pet owners with
a new pet at home, to initiate conversations about the need for high quality medical insurance.
08
As we continue to mature as a business, some of the skills we have been learning will start to become
further embedded into our business units. Converting our leads and retaining our members will be
essential skills needed across all business units: geographies, product lines, and distribution channels.
While we are currently dedicated to supporting the core Trupanion product, we will adjust to support
our new products and partners, speed up the learning process, and ultimately help these new lines
of business to grow faster. We’ve spent 20 years learning how to do this for Trupanion; now we can
take that learning and apply to other products and brands.
C) Conversion
Growing our ability to educate and inform pet owners “Why Trupanion” will continue to be a major
focus for many teams in the business.
Conversion is measured as a blend of pet owners converting both online and over the phone.
Our phone conversion rates have been consistently strong in past years and we have come to
expect more than 1 in 2 pet owners will enroll this way. As we look to continue to grow the core
Trupanion product, phone conversion will play a key role in establishing the first “brand cuddle.” We
are committed to call-driving initiatives to maximize our opportunities. This high-touch experience
gives us a rare chance to connect directly with our members and to hear about their pets! This will
remain a key part of our strategy. It’s why we love what we do!
Online conversion is more challenging. We have made good progress to improve this—most
significantly in 2020—and will continue to focus in this area. We will adjust our lens further to fully
support complete digital conversion to encapsulate all device-type experiences that a future
member may have access to—text, mobile, chat, email, web, tablet, etc. We intend to increase our
digital conversion rates from 11% to well over 20% by the end of 2025.
This increase in digital conversion will significantly increase our blended conversion—web and
phone conversion rates combined—from over 15% in 2020 to over 25% by 2025. We set this goal
because we believe that 1 in 4 pet owners is a potential Trupanion member, and we are targeting
a blended conversion rate that is representative of that.
As well as supporting the core Trupanion product, our conversion skills will be applied to support new
geographies, products, and distribution channels. We will inevitably require growth in this space to
support so many new business partners across the company.
09
D) Enhance our member experience
In addition to increasing access to our software, paying invoices faster, and pricing more accurately,
we will continue to invest time and resources into further enhancing our member experience.
Developing technologies and finding ways to engage, surprise, and delight our members will be key
to create an increase in lifetime value, referrals, and pets added to support TruTopia.
While we look to grow our Trupanion-brand product substantially, our target Adjusted Operating
Margin (AOM) will remain at 15%. We expect to miss this target at the end of the current 5-year Plan
by about 1%. For the next 5-year chapter, we anticipate achieving the 15% goal as follows by 2025:
Targeted Adjusted Operating Margin
9%
72%
4%
15%
Value Proposition—Claims payment and processing cost
Variable Expenses—Amount we spend to provide excellent customer service
Fixed Expenses—General and Administrative, Technology and Development
Adjusted Operating Margin (AOM)
To support this operational efficiency, we will look to invest more in our financial systems and teams,
such as introducing a new accounting and human resources information system and working with
leading technology providers to give access to tools that allow for quicker decision making and
easier reporting for all. As we increase the need to support a growing number of brands, countries
and products, we will invest in our people and technology to do this the right way.
ANCILLARY PRODUCT GROWTH
As well as driving the growth of the core Trupanion product, we will look at expanding our expertise
to support the development and launch of new products. The products below will be focused in the
North American markets initially. Depending on launch metrics and growth acceleration, we may
choose to deploy these in other geographies before the end of 2025 too—time will tell.
BUILDING BLOCK 2—INSURANCE-PHI DIRECT AND FURKIN
Over the next 5 years we are excited to launch two new subscription products—PHI Direct and
Furkin—into the North American market. Our ability to operate at scale means that we are now able
to support the development of new brands and accelerate their growth curve—which also allows
the broader Trupanion family to grow. Many of our operational teams will be involved in bringing
these two brands to life—we will be expanding our contact center, claims, finance, communications,
marketing, IT, people ops, legal and facilities teams in support of these product additions.
10
These new pet medical insurance products will offer pet owners different price point choices.
Critically, each will offer the same high value proposition as our Trupanion-brand product (the
targeted 72% spent paying invoices). The brands will not be marketed together but by being
available, they will help pet owners to clearly understand the difference in coverage.
We believe that when we can educate pet owners about the real differences between high, medium
and low ARPU products—Trupanion (high ARPU = broadest and most comprehensive coverage),
Furkin (med ARPU = mid-level coverage) and PHI Direct (low ARPU = lowest level coverage)—we can
grow penetration of the industry and Trupanion Inc.’s overall share of market. In short, we know that
some consumers may enroll in brands other than Trupanion, which is OK if they are informed and
understand the difference in coverage. If that occurs, we want them to make an educated decision
and enroll with a brand that we own that provides high value and is not misleading.
We plan to launch these products in Canada and then the US. The products will be marketed as
direct-to-consumer brands and will not be sold through our Territory Partners and Associates, nor will
they be Powered by Trupanion.
BUILDING BLOCK 3—INSURANCE: INTERNATIONAL GROWTH-HOSPITALS & PET GROWTH
The more hospitals we partner with, the more pets we help. Over the next 5 years we intend to take
advantage of opportunities to expand into countries other than the U.S, Canada and Australia.
Our partnership with Aflac presents us with a direct opportunity to enter into Japan where Aflac
has customers in 1 in 4 households! We have plans to explore this early into our next 5-year chapter.
In addition to Japan, we don’t know exactly which countries we’ll move to next. We anticipate
potential expansion into countries such as the UK, Brazil, and potentially parts of Western Europe. In
keeping with our approach in the North American market and Australia, we will create leadership
positions to oversee the general management and growth for each of these new geographies.
Our goal for entering into these additional markets is to double the number of hospitals where pet
owners can learn about our Trupanion-branded product from about 25k today to 35k by the end of
2025, and then to 50k by the end of 2030.
For each hospital we enter, we will use the same unit of measurement for success—striving for
consistent growth in same-store-sales to maximize our reach to each new pet entering a hospital.
Naturally, the core elements of a growth model to drive leads and increase conversion and member
retention will be critical ingredients for sustainable brand growth and increased contribution to the
Trupanion Inc. growth curve.
We may also move forward with international partners and use our expertise to grow non-Trupanion
brand products as well, should an appropriate and meaningful opportunity arise.
BUILDING BLOCK 4—FOOD-LANDSPATH
Our wellness food initiative is based on the theory that pets who are fed portion-controlled, high-
quality food will live longer, healthier, and happier lives. We have a hypothesis based on third-party
health and nutritional studies that these pets could have up to 2 years extended life. We are very
excited to launch this new product—named Landspath—which will be sold directly through the
veterinary channel.
11
In 2021, after over two years of research, we anticipate launching this venture in partnership with
leading therapeutic food company, Rayne Clinical Nutrition. We will initially launch to our member-
base and expect to begin working with partner hospitals across North America within the first 6
months of the year.
If our hypothesis is true, members with pets eating Landspath will enjoy the benefits of savings on our
insurance products because we will have data to demonstrate that they are less prone to illnesses.
This integrated product approach will be a fantastic member benefit and experience.
Landspath creates a much-needed source of recurring revenue that supports the veterinary channel
and creates additional value for our members.
The market for pet owners who want to invest in their pet’s health via high quality food is substantial:
We aim to be selling $100m in revenue of food each year by the end of 2025.
BUILDING BLOCK 5—PET CARE-GPS TRACKER
There are around 180 million cats and dogs in North America. About one third will go missing at some
point in their lives. Eighty percent will not be recovered. Rather than anxiously waiting and hoping
someone takes a lost pet to a shelter or veterinarian to scan a microchip that may or may not be
there, our solution is to enable pet owners to instantly locate their pet using an app on their phone
through a self-charging, patented GPS unit which attaches to the pet’s collar.
We will create a GPS team that will operate as a start-up business unit, separate to the core Trupanion
business. We feel we can leverage our operating scale to support this business to accelerate growth,
but acknowledge that it is equally important for the GPS owner to be able to move with pace
outside of the core business.
BUILDING BLOCK 6—TECHNOLOGY SOLUTIONS
To help the growth of Trupanion and associated brands we will be making investments to significantly
bolster our internal—and external-facing technology systems in direct support of our ever-expanding
IT team. The value of this incremental technology investment will be a key advantage to drive
support, efficiencies and a smarter way of working for the entire business.
We anticipate that through acquisitions of leading pet health technology companies such as
Aquarium and BabelBark, we will be able to rapidly increase our pace of technology growth across
Trupanion Inc.
In addition to adding value internally, we will also consider how technologies can be shared and
re-sold to others in the pet space—building on the infrastructure and expertise we have already
developed through our patented software while also ensuring the technology that we consider a
competitive moat is maintained. As with all opportunities, the revenue target will be $100m with an
AOM of 15% or $15m of adjusted operating income.
Much like GPS, the technology support for the Trupanion brand and associated products is our
biggest motivation and the main value-driver for this initiative.
12
TRUPANION INC. & OUR BRAND FAMILY
The next 5 years will open up a whole new approach to the way we think about ‘Trupanion’, our
much loved brand.
Historically, the vast majority of our company has been focused on the growth of one product
and because of this we have referred to our entire business as Trupanion. Through the hard work
and strong execution of our team, we have earned the right to represent far more of the brands in
the insurance market and the broader pet space. The core Trupanion product will continue to be
the largest and biggest revenue generator for the next 5 years. However, as we grow we have the
opportunity to extend that reach and to help more pets.
We believe Trupanion Inc. (our parent company 5) can drive the growth of products outside of
insurance such as GPS, Food and Technology. As experts in the pet world, we are confident in our
ability to help support our mission in more ways than just insurance and we’re excited to do so!
OUR BRAND & PRODUCT ECOSYSTEM
With the introduction of so many brands into our family, it’s important to be clear when we are talking
about our core Trupanion product versus things the Trupanion Inc. team might be involved in. The
visual below demonstrates the consumer facing brands that will exist in our ecosystem between
2021 and 2025.
“Powered by Trupanion”
A brand mark applied to products that
carry the following features:
• Payment, direct to the veterinarian
at the time of check-out
• 24/7 customer support
• TP Nation support
“Trupanion” 1.2, 2.0, 3.0...
We should expect our core product,
referred to as “Trupanion” to always be
the best possible product avilable. We
will continue to iterate on the features
and coverage and allow our product to
evolve and grow as the pet, pet owner
and veterinarian needs adjust.
It will have the highest Lifetime Value and
the highest allowable Pet Acquisition Cost.
“TRUPANION”
BEST
COVERAGE
1.0 & 2.0
“POWERED BY
TRUPANION”
PHI
DIRECT
Mission
To help loving, responsible
pet owners budget and
care for their pets.
GPS
LANDSPATH
FURKIN
5
All brands and entities roll into Trupanion, Inc. overall and our stock and shareholders are in the parent company.
13
POWERED BY TRUPANION
As our brand grows and our referral rates increase, we are becoming more widely recognized as
providing pet owners and veterinarians with a quality and unrivalled member experience. As this
positive brand association gains momentum we will begin to allow use of our brand in support of
new entrants to the insurance market—brands looking for the best possible association with an
expert partner. This approach unlocks the power of Trupanion for many other products. The tagline
“Powered by Trupanion” will sit proudly alongside brands in the future—starting with Aflac in 2021.
“Powered by Trupanion” will become a brand reference serving as a hallmark of quality indicating
to pet owners and veterinarians that whenever Trupanion is involved, the pet owner should expect
a best-in-class experience. This will include:
• Payment direct to the hospital at the time of invoice and access to our world-class
claims team
• 24/7/365 customer care and support
• Retention support from TP Nation to help drive greater retention at the hospital level (This
is for retention only. Brands will not be leveraging TP Nation as a sales team but as an
ongoing resource of support. TPs help to create the brand assurance for which Trupanion
has become known).
Some brands may also look to us to offer services in addition to the core “Powered by” elements,
such as sales, marketing and communications. Unlike the three core elements, other support services
can be provided on an individual basis and decided on by the brand. Think of it like a continuum
where our brand partners can choose the level of involvement they have to suit their needs.
Third-party Partners Service Level Spectrum
“Powered by Trupanion”
Light Service
Custom Service
Full Service
“ Powered by Trupanion”
Core attributes:
Vet Direct Pay
24/7 Customer Care*
Claims processing
TP Nation (Retention)
Other support services
can be provided on an
individual basis
and decided on by
the Partner
“ Powered by Trupanion”
Core attributes plus:
All Sales
All Marketing
All Communications
*24/7 Customer Care must be avilable for all brands carrying “Powered by Trupanion” but it
does not mean it needs to be conducted by Trupanion.
We are looking forward to expanding the reach of the Trupanion brand into new product lines to
help provide assurance to more pets, pet owners, and veterinarians around the world.
14
HOW WE MAKE GROWTH DECISIONS
Aside from reinforcing our moats and working on creating our building blocks to growth, there will
continue to be many opportunities to grow our current business or to expand into new areas. To
ensure we remain focused and committed to our strategic plan, we have outlined key decision
criteria that will be applied ahead of moving forward with an opportunity:
• We will not move forward with an initiative unless it benefits all of our key stakeholder groups:
- Pets
- Pet Owners
- Veterinarians
- Team Members, Territory Partners, and Associates
- Strategic Partners
- Investors
• The opportunity must be worth our time and investment. Specifically, after 5 years we want
it to be able to generate $100m + in annual revenue with Adjusted Operating Income of
at least $15m. (These financial results could be generated directly from the opportunity or
indirectly by benefitting an existing brand).
• We have and are willing to invest the resources (people, funds) in order to be successful. If
something is worth doing, we will do it the right way.
• We have alignment with a potential partner regarding their approach to diversity, equity
and inclusion.
• We will consider the impact to our current business and create a clear roadmap and
prioritization framework to help our teams to understand the “why.” We want people to
enjoy these opportunities and to feel ready and able to execute on them.
• We won’t move forward with an opportunity if it’s going to negatively impact one of
our moats.
• We won’t move forward with an opportunity if we believe it will negatively impact one of
our brand tenents or core beliefs (such as selling our data or adding wellness to the core
Trupanion product).
To set ourselves up to handle new products, new geographies, and new distribution channels our
core operational teams will receive significant investments in systems, people, infrastructure, and
training. Some of these investments will be made in enterprise technologies such as accounting
and human resource information system (HRIS), policy administration, BI platforms, digital asset
management, training and communication platforms, remote working advancements, financial
reporting, and many more.
15
OUR PEOPLE AND OUR CULTURE
Our 5-Year Plan would not be complete without talking about our best asset: our people. A lot will
determine whether we achieve the goals in this Plan, none more so than whether we have the right
people in the right roles, whether we help them be the best they can be, and whether we offer an
environment that makes Trupanion the destination to build a career.
We are committed to establishing a company-wide diversity, equity, and inclusion strategy to create
an increasingly fulfilling and engaging workplace for everyone. We believe that diversity, equity,
and inclusion are critical to supporting our team members and improving our ability to achieve our
mission. We will define key corporate goals to ensure these ideals become fully embedded in who
we are.
For our team members, the work reflected in this 5-year Plan should mean many career growth
opportunities and the benefits that come from being a part-owner of a successful growth company.
To help so many more pets with more products in more places, we know our organization will look
very different at the end of 2025. We will be a lot bigger and we will need to develop more leaders
to keep us moving forward. Doing this well will be the single biggest driver of our success.
Finally, while this Plan is devoted to looking forward, we also want to preserve the great parts of how
we got to this place where we can even contemplate these ambitious goals. We want everyone
who joins us in the future to know the first pet we insured, about how the conference rooms got their
names, about why we ring the bell, and all the other things that make us who we are.
We look forward to sharing your energy and enthusiasm for this next generation of Trupanion and
your commitment to bringing this plan to life.
Thank you for being with us.
16
2020
Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. ☒
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, 2020, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $1,416,026,489 using the closing price on that day of $42.69.
As of February 4, 2021, there were approximately 39,473,833 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 2021 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, 2020.
TRUPANION, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2020
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
10
33
33
33
33
34
36
38
54
55
86
86
88
89
89
89
89
89
90
92
93
95
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 (Exchange Act), 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
Item 1. Business
Our Mission
PART I
Our mission is to inform and help loving, responsible pet owners budget and care for their pets—for life.
Company Overview
We provide medical insurance for cats and dogs throughout the United States, Canada, Puerto Rico, and Australia. Our data-
driven, vertically-integrated approach enables us to provide pet owners with products that offer what we believe is the highest
value medical insurance, priced specifically for each pet’s unique characteristics.
We operate in two business segments: subscription business and other business. We currently generate revenue in our
subscription business segment from subscription fees related to our “Trupanion” branded products. Our other business segment
is comprised of revenue from other product offerings that generally have a business-to-business relationship and different
margin profiles than our subscription segment, including revenue from writing policies on behalf of third parties and revenue
from other products and software solutions.
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 monthly subscription products, priced specifically for each pet’s unique characteristics, help pet owners budget for
unforeseen medical expenses. Our core “Trupanion” product was designed by veterinarians to enable them to practice best
medicine – thus recommending the optimal treatment for the pet. High quality medical insurance for pets prevents decisions
being made due to financial constraints and ensures the best care for the pet. As a result, we believe our Trupanion product
enables veterinarians to establish stronger ties and better alignment with their clients. Trupanion 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 or co-payment 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 other players in the industry, enabling us to
provide our members with the highest value proposition.
Our core “Trupanion” product also provides a differentiated experience to our members, including the use of our proprietary,
patented software that is designed to communicate directly with a veterinary hospital’s practice management software. Using
our software, veterinary hospitals can receive payment from us directly for approved invoices in seconds, with their clients (our
members) only paying their deductible or co-payment of covered treatments. We believe this unique solution, which is offered
free to veterinarians and pet owners, transforms the insurance experience.
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 in our subscription business. 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 acquiring as
many pets as possible at our targeted average estimated internal rate of return.
3
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 862,928 pets on December 31, 2020, which represents a
compound annual growth rate of 35%. As a result, our revenue has grown from $19.1 million in 2010 to $502.0 million in
2020.
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 leads from veterinary hospitals. We intend to increase the number of veterinary hospitals that help their clients
learn about high quality medical insurance, and to increase the rate at which active veterinary hospitals refer leads to us by
leveraging our Territory Partners.
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.
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 year of enrollment. Member retention is a key part of our strategy. Historically,
members in their first year 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 use machine learning 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 process veterinary invoices in seconds and 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.
4
Expanding internationally. While we are primarily focused on capturing the large opportunity in the U.S. and Canadian
markets, we also operate in the Australian market through a joint-venture, and we continue to explore other international
expansion opportunities.
Expanding our product offering. We intend to introduce additional monthly subscription products, maintaining what we
believe to be the highest value pet medical insurance, but with varying levels of coverage.
Pursuing other revenue opportunities. We 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 medical
insurance. In addition, 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. We also may continue to
expand our other business segment by selling software solutions to third parties.
Sales and Marketing
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.
We build awareness of our core Trupanion product predominately through the veterinary community, engaging our team of
“Territory Partners”. 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. 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.
Competition
We compete primarily with pet owners who choose to self-fund their veterinary costs, mainly via credit cards, 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, the broadest coverage, and 24/7 service to our members. 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 given 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 most likely to go wrong, 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.
Human Capital Resources
Our Team
We are a mission driven organization with a diverse team united by a shared passion for pets. Our team members are our
greatest asset, and we focus on attracting great people to our team and offering high-quality experiences to all team members.
As of December 31, 2020, we employed 911 people across the U.S., Canada and the U.K. Our team is further supported by 152
field sales Territory Partner business owners and their associates who represent Trupanion. We also contract with team
members in Philippines through a third-party service provider and in Australia through a joint venture.
About two thirds of our employees work in our Seattle headquarters office (pre-COVID), and others work virtually across the
U.S., Canada, and U.K. Our Seattle headquarters office is pet friendly and 400+ dogs and cats are signed-up to work at the
office alongside their human coworkers.
Benefits
We offer each team member the same benefits, regardless of role or level in the organization. We also recognize the importance
of family and design our benefits plans to support the physical, financial, and emotional wellbeing of team members and their
families.
The benefits available to all team members regardless of role include:
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Childcare & Support for Parents – We understand the importance of family and offer benefits to support working
parents. Most notably, we offer onsite childcare at our Seattle headquarters. Trupanion pays 100% of the tuition costs
for one child per Trupanion team member, when space is available.
Resources for Wellbeing – We offer a variety of benefits to support wellness at and away from work, including free
access to our onsite gym, complimentary yoga classes, and an Employee Assistance Program for confidential support
to navigate life's challenges.
Sabbatical - For every five consecutive years of service at Trupanion, team members are eligible for a paid five-week
sabbatical.
Paid Volunteer Time – The TruGiving Volunteer Program offers one paid work day per year to volunteer with an
organization of each team member's choice.
Paid Time Off – At least four weeks of paid time off is granted to team members each year in January, and increases
with tenure.
• Medical Insurance for You – Trupanion pays 100% of the premiums for team members’ medical, dental, and vision
coverage and offers options to enroll eligible family members.
• Medical Insurance for Your Pet – Team members have the option to enroll one dog or cat in 100% company paid
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Trupanion medical insurance at the highest coverage level we offer.
Leave of Absence & Salary Continuation – We provide all team members that are too ill or injured to work with
access to time off through leave of absence at a reduced percentage of their salary through our disability pay programs.
Severance and Change in Control Policy – We have a Severance and Change in Control policy that applies equally to
all team members, regardless of their role at Trupanion.
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Diversity, Equity, and Inclusion
We believe that diversity, equity and inclusion is critical to supporting our fellow team members and enhancing our ability to
fulfill our mission and achieve our goals. We strive to offer an environment where individuals with diverse perspectives and
backgrounds (including but not limited to the BIPOC community, disabled people and the LGBTQIA+ community) are valued
and have the ability to contribute their full potential. A core tenet of Trupanion is that we offer a work experience that applies
equally to all team members, regardless of role, as noted for example with respect to our Benefits offerings. This approach
extends throughout the way we work together; for example, each team member works in an open environment without
hierarchy affecting size of working space.
We have multiple employee resource groups that celebrate aspects of our team’s diversity and provide a welcoming and safe
space for support, education, and networking.
We have a large representation of women at Trupanion including over 65% of leadership positions. As part of our strategic
plan, we have also set a goal to increase the representation of people of color on our team. To achieve this goal we will take
specific actions to hire more diverse talent, develop and retain these team members, and further a culture of inclusion at
Trupanion. For example, among other steps we have taken, we are hiring a Director to focus exclusively on DEI, we are
establishing new relationships with partners focused on sourcing BIPOC talent, and we have a DEI Council that works in
tandem with us towards meeting our representation goal.
Trupanion is committed to paying equitably for equal work, regardless of gender or race/ethnicity, and conducts pay equity
analyses as part of our efforts in furtherance of this commitment.
Career Development
At Trupanion we are committed to helping everyone grow and thrive along with the company. We are proud to continually see
about 20% of our team members transition to new roles within the company each year. Team members have access to ongoing
development designed to help them succeed in their roles today, develop skills for the future, and build a career at Trupanion.
A sampling of our development opportunities include:
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TruUniversity (TruU) – All team members participate in TruU company orientation to learn about our history, culture,
product, business model, and operations.
• Mentorship – Our TruMentor program creates connection across departments, so team members can learn from and
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support each other in their development.
Professional skills – Our continuing education course catalogue includes a wide variety of topics related to our
business, the animal health industry, and professional skills.
Leadership Development – We offer specific leadership development programs both for new managers leading for the
first time and for more experienced leaders leading teams of other leaders.
Safety
We are proud of our response to the COVID-19 pandemic. We were one of the first Seattle-area public companies to transition
to fully virtual work, doing so before it was required. Since then we have kept our culture alive with more frequent all hands
meetings and office hours with leadership, and converted many of our office events, like the annual Pet Pageant, to virtual
formats.
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
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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.
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 $79.1 million as of
December 31, 2020 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, 2020,
APIC had four IRIS ratios outside the usual range, relating to net premiums written to surplus, change in net premiums written,
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, 2020, the account held
CAD $5.8 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.
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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 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.
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 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.
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Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties
described below, together with all of the other information in this report, including our consolidated financial statements
and related notes, as well as in our other filings with the SEC, in evaluating our business and before investing in our
common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties
that are not expressly stated, that we are unaware of, or that we currently believe are not material, may also become
important factors that affect us. If any of the following risks occur, our business, operating results, financial condition and
prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or
all of your investment.
Summary of Material Risk Factors
Our business is subject to numerous risks and uncertainties of which you should be aware. Among others, these risks relate to:
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Our results of operations, including adverse impacts from the COVID-19 pandemic, our significant net losses since
inception, our ability to achieve or maintain profitability in the future, and our ability to maintain our rate of revenue
growth;
Our ability to grow our member base, including by attracting new members from internet searches and from leads
generated from Territory Partners, veterinarians and other third parties, to retain these members, and to recover our
member acquisition costs;
Our engagement of Territory Partners as independent contractors rather than employees;
The pricing of our subscription, the actual levels of our veterinary invoice expense (which may increase with use of
our patented software for direct payment of invoices), and our ability to timely and accurately process valid invoices
and to identify improper invoices;
Our need to maintain certain levels of surplus capital under applicable insurance regulations;
Competitive challenges and our ability to maintain and enhance our brand;
Emerging claim and coverage issues;
Our ability to maintain and scale our infrastructure, to invest in or acquire businesses, products and technologies, and
otherwise to manage our growth;
Our reliance on key personnel, strategic relationships and a Canadian insurance company for our Canadian operations;
Variations in our operating results, fluctuations in foreign exchange rates, other issues relating to expanding our
operations internationally, and general changes in the economy;
Our efforts to establish multiple insurance subsidiaries;
Our ability to maintain effective internal controls and security measures;
Our acceptance of automatic fund transfers and credit card and debit card payments;
Owning an office building;
Our ability to protect our intellectual property (IP), to avoid violating IP rights of other, and to maintain relationships
with third parties providing necessary IP and technology to us;
Litigation or regulatory proceedings;
Compliance with covenants in our current credit agreement and limitations that may arise in connection with any
future indebtedness we may incur;
Tax liabilities and our ability to use net operating loss carryforwards;
Compliance with the numerous laws and regulations applicable to our business, including state, federal and foreign
laws relating to insurance, privacy, the internet, email and texting, and accounting matters; and
Our common stock, including trading price declines from missed earnings guidance, inadequate analyst coverage,
trading volatility, lack of dividends, concentrated ownership, and anti-takeover provisions in our governing
documents.
Risks Related to Our Business and Industry
Our results of operations may be adversely impacted by the COVID-19 pandemic.
The global spread of the COVID-19 pandemic and related containment efforts have created significant economic disruption. To
date, the pandemic has not had a material adverse impact on our business, although it could impact growth rates in the future.
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The COVID-19 pandemic and related public health measures have resulted in significant unemployment. The related
economic impact on consumers may result in decreased new enrollments in our subscription and increased
cancellations.
The global work-from-home operating environment has restricted some of our Territory Partners from conducting
face-to-face visits with veterinarians and their staff.
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Veterinarians have reported that pets may contract COVID-19, and the extent to which COVID-19 may be
communicable among humans, dogs and cats and its health impact on pets is somewhat uncertain. An increase in
COVID-19 among pets may cause our veterinary invoice expense to increase.
• While we are not currently experiencing any meaningful decreases in veterinary invoice expenses, many insurance
companies within the property and casualty insurance space are providing refunds to policyholders in light of reduced
claims trends they are experiencing, and it is possible that state insurance regulators may require us to provide refunds
or otherwise change our behavior.
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The duration of the pandemic, whether it may recur, and its other long-term impacts are highly uncertain and cannot be
predicted. These risks and uncertainties make it challenging to manage our growth, maintain business relationships,
price our subscription plans and otherwise plan for our business.
In accordance with local and state directives, we have shifted our operations from our corporate office facility located in Seattle,
Washington, and substantially all of our personnel are working from home. We have not conducted business in this manner
previously, do not know how long we may need to continue in this manner, and may experience reduced productivity of our
employees, greater exposure to cybersecurity threats, or other operational risks. Similarly, many of our Territory Partners, our
vendors, the businesses for which we write policies in our other business segment, and our strategic partners are working from
home, and many veterinary hospitals are working at reduced staffing levels and hours of operation. The extent to which these
parties suffer inefficiencies or other risks from their work-from-home arrangements, and the extent to which those risks may
impact us, is impossible to predict.
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 $5.8 million and $1.8 million
in the years ended December 31, 2020 and 2019, respectively, and as of December 31, 2020, we had an accumulated deficit of
$91.4 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 achieve and 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, do not exceed our revenue. We expect to make significant expenditures and investments in
member acquisition and product initiatives and these expenditures may not result in additional growth. 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:
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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;
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• maintain positive relationships with and increase the number and efficiency of Territory Partners;
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create and maintain positive relationships with strategic partners, particularly partners who create software solutions
for veterinary practices;
continue to offer products with 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;
protect and defend our critical intellectual property;
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increase awareness of and positive associations with our brand;
react to unexpected developments and general macroeconomic conditions, including pandemics and related economic
impacts; 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.
We have made and plan to continue to make significant investments to grow our member base. We spent $45.1 million on sales
and marketing to acquire new members for the year ended December 31, 2020. 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 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. 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 which may 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, 2020,
we generated 77.0% 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 in general and our subscription in particular. To maintain our
existing member base, we need to continue to reinforce the value of our subscription.
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We utilize Territory Partners, who are paid fees based on enrollments in their regions, to communicate the benefits of medical
insurance to veterinarians through, prior to the COVID-19 pandemic, in-person visits and more recently, through remote
communications. 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 and
increasing our social media footprint, which are likely to increase our acquisition costs. In addition, these plans may face
unexpected delays, costs or other challenges, such as decreased ability of Territory Partners to conduct in-person veterinarian or
less effective development of other third-party relationships.
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:
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the competitiveness of our subscription, including its perceived value, simplicity, and fairness;
changes in consumer shopping behaviors due to circumstances outside of our control, such as economic conditions, the
COVID-19 pandemic and containment efforts, 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.
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 2020 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, complementary 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.
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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 with a Territory Partner 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 and their 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. Moreover, Territory Partners may
not require, or applicable law may not permit, that employees or other service providers engaged by Territory Partners be
subject to non-compete obligations and these employees and service providers may provide services to our competitors.
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. Some data that feeds into our analytics platform is provided by third-party
sources and these sources may limit or prevent us from accessing the data. Additionally, the assumptions we make about breeds
and other factors in pricing may prove to be inaccurate and, accordingly, these pricing analytics may not accurately reflect the
expense that we will ultimately incur. Furthermore, if any of our competitors develop similar or better data systems, adopt
similar or better underwriting criteria and pricing models or receive our data, our competitive advantage could decline or be
lost.
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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 profitability 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 applicable 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. If external factors caused veterinary
invoice expenses to significantly decrease, the review and approval of our proposed pricing may be impacted. 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.
We maintain a recorded reserve for veterinary invoices that 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.
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.
If 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, which may have a material adverse effect on our financial condition.
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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 $79.1 million as of
December 31, 2020. 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, 2020, the account held CAD $5.8 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.
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.
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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.
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.
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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.
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, particularly as the COVID-19
pandemic evolves. 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.
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We depend on key personnel to operate our business and, if we are unable to retain, attract and integrate qualified
personnel, our ability to develop and successfully grow our business could be harmed.
Our success depends to a significant extent on the continued services of our current management team, including Darryl
Rawlings, our founder and Chief Executive Officer. The loss of Mr. Rawlings or several other key executives or employees
within a short time frame could have a material adverse effect on our business. We employ all of our employees, including
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.
We 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 in the past created, invested in or acquired complementary businesses, products, technologies and new lines of
business, and we may continue to do so in the future. 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. We have also recently acquired technology intended to enable us to improve our back-end software and facilitate
certain expansion efforts, but technology integration is complicated, expensive and time consuming, and it may not result in us
realizing the intended benefits from the acquisition.
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 may not realize the benefits of our current and planned transactions with Aflac.
In October 2020, we entered into a Strategic Alliance Agreement, a Stock Purchase Agreement and a Shareholder Agreement
with Aflac Incorporated (Aflac). Aflac purchased an aggregate of $200.0 million of our common stock.
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The Strategic Alliance Agreement sets forth the structure for an alliance with Aflac, including its intended benefits to us
relating to brand, access and distribution as well as go-to-market matters. We and Aflac have agreed to negotiate in good faith
and to act reasonably with each other in order to agree on such terms as are necessary to fully implement the alliance. However,
we may be unable to establish the terms for and implement the alliance and, as a result, we may not realize the intended benefits
of the alliance. In addition, we have agreed not to develop with a third party any worksite employee benefit regarding its pet
insurance in the United States or Japan and to work exclusively with Aflac to develop opportunities in Japan’s pet insurance
marketplace, which may prevent us from pursuing alternative opportunities. If we are unable to implement the terms of the
alliance, Aflac's obligations in the Shareholder Agreement, including standstill obligations and contractual holding period
requirements, would terminate, which may have an adverse effect on our stock price and otherwise cause our business to 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:
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we may be unable to maintain or secure favorable relationships with strategic partners;
our strategic partners may not be successful in creating leads;
we may be unable to convert leads from our strategic partners into enrolled pets;
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;
we may not experience a consistent correlation between revenues and expenditures related to the partnership; and
bad publicity and other issues faced by our strategic partners could negatively impact us.
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, 2020,
premiums from policies sourced by general agents accounted for 21% 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.
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.
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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, 2020, approximately 16% 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.
Our decision to set up multiple insurance subsidiaries 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 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.
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.
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If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a
result, someone obtains unauthorized access to our data, including data of our members, our reputation may be damaged, our
business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to
sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to
anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security
occurs, the public perception of the effectiveness of our security measures could be harmed.
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.
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. 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.
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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.
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, including our proprietary software,
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 or our proprietary software 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.
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.
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, 2020, we had U.S. federal net operating loss carryforwards of approximately $157.8 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.
Changes in the economy may affect consumer spending on our subscription and this 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 entered the Australian market through a joint venture and we are actively exploring entering
other countries. We have limited 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;
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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.
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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.
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. For instance, our arrangement with Aflac requires that, before we issue or sell equity to another investor, we are required to
provide Aflac an opportunity to purchase equity allowing them to maintain their ownership percentage. This requirement may
introduce delays or prevent us from raising funds through the issuance of securities. 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;
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impose fines and other penalties; and
impose continuing education requirements.
While the U.S. federal government does not directly regulate the insurance industry, federal legislation and administrative
policies can also affect us. Congress and various federal agencies periodically discuss proposals that would provide for federal
oversight of insurance companies. We cannot predict whether any such laws will be enacted or the effect that such laws would
have on our business. We also do business in all ten provinces and three territories of Canada. The provincial and territorial
insurance regulators have the power to regulate the market conduct of insurers and insurance intermediaries, and the licensing
and supervision of insurance agents, and brokers, along with enforcement rights, including the right to assess administrative
monetary penalties in certain provinces.
Insurance companies are also regulated at the federal level in Canada, and the Insurance Companies Act prohibits a foreign
entity from insuring risks in Canada unless it is authorized by an Order made by the Superintendent of Financial Institutions
(Canada) permitting it to do so.
Due to the complexity, periodic modification and differing interpretations of insurance laws and regulations, we have not
always been, and we may not always be, in compliance with them. 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 considered 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 or 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 have larger rate increases in subsequent periods. This could damage
our reputation with our members and reduce our retention rates, which could significantly damage our brand, result in the loss
of expected revenue and otherwise harm our business, operating results and financial condition.
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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.
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.
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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.
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.
29
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, further
international expansion, and entry into complementary businesses such as pet food, 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.
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 independent registered public accounting firm 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. In addition, we have recently provided information regarding
how we think about the drivers of and our method of calculating our intrinsic value, including related statements regarding
discounted cash flows and underlying assumptions (such as pet enrollment, revenue per pet, lifetime values of a pet, pet
acquisition costs, and other costs and expenses).
These statements are based upon a number of assumptions and estimates that, while presented with numerical specificity, are
inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond our
control, including those described in these "Risk Factors" and elsewhere in this report. 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 and other information regarding our view of the drivers and calculation method of
our intrinsic value is to provide a basis for our management to discuss our business and outlook with analysts and investors.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying these
statements will not materialize or will vary significantly from actual results. Accordingly, these statements are only estimates of
what management believes is reasonable as of the date of release. Actual results may vary and the variations may be material. In
light of the foregoing, investors are urged not to rely upon our guidance or other information regarding our view of the drivers
and calculation method of our intrinsic value in making an investment decision regarding our common stock. In addition, we do
not accept any responsibility for any projections or reports published by any such third parties, and we urge you not to place
undue reliance on those statements.
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.
30
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;
recent private sale of our securities to Aflac;
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.
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. 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
31
•
•
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.
Our board of directors recently approved an Employee Severance and Change in Control Plan that applies to each employee of
our company. This plan provides certain benefits to our employees in the event there is a change in control of our company and
an employee is terminated under certain conditions. Potential acquirers may determine that the possible payments under this
plan make an acquisition of our company unattractive.
32
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.
33
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 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. Any further determination to pay
dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, 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 4, 2021, there were 32 registered 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 2021. See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.”
34
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, 2015 through
December 31, 2020 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.
Trupanion Inc.
S&P Small Cap 600 Index
NASDAQ-100 Technology Sector Index
Russell 2000 Index
12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
$
$
$
$
100.00 $
159.02 $
299.90 $
257.58 $
376.64 $ 1,226.54
100.00 $
124.74 $
139.38 $
125.78 $
152.02 $
166.57
100.00 $
124.05 $
169.56 $
159.31 $
235.32 $
326.10
100.00 $
119.48 $
135.18 $
117.79 $
146.51 $
173.86
35
Period EndingIndex ValueComparison of Cumulative Total ReturnAmong Trupanion, S&P Small Cap 600 Index, NASDAQ-100 Technology Sector Index, and Russell 2000 IndexTrupanion Inc.S&P Small Cap 600 IndexNASDAQ-100 Technology Sector IndexRussell 2000 IndexBase Period12/31/201512/31/201612/31/201712/31/201812/31/201912/31/20200501001502002503003504004505005506006507007508008509009501,0001,0501,1001,1501,2001,2501,300 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
Operating expenses:
Technology and development(1)
General and administrative(1)
Sales and marketing(1)
Depreciation and amortization
Total operating expenses
Year Ended December 31,
2020
2019
2018
2017
2016
(in thousands)
$ 387,732 $ 321,163 $ 263,738 $ 218,354 $ 173,356
114,296
502,028
62,773
383,936
40,218
303,956
24,313
242,667
14,874
188,230
314,875
105,252
420,127
262,139
56,873
319,012
215,992
36,598
252,590
176,883
22,734
199,617
141,321
13,621
154,942
9,947
21,847
47,837
7,071
86,702
7,025
18,384
35,451
5,632
66,492
5,796
17,104
24,999
4,512
52,411
—
6,226
16,130
19,104
4,232
45,692
—
6,466
14,427
15,247
3,846
39,986
—
Gain (loss) from investment in joint venture
(126)
(352)
Operating loss
Interest expense
Other (income) expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
(4,927)
(1,920)
(1,045)
(2,642)
(6,698)
1,381
1,349
1,198
533
(581)
(1,629)
(1,309)
(1,244)
218
(58)
(5,727)
(1,640)
(934)
(1,931)
(6,858)
113
169
(7)
(428)
38
$
(5,840) $
(1,809) $
(927) $
(1,503) $
(6,896)
(1) Includes stock-based compensation expense as follows:
Cost of revenue
Technology and development
General and administrative
Sales and marketing
Year Ended December 31,
2020
2019
2018
2017
2016
$
1,586 $
1,050 $
927 $
594 $
(in thousands)
758
3,795
2,773
364
3,312
2,120
209
2,304
1,335
216
1,887
722
275
246
1,893
532
Total stock-based compensation expense
$
8,912 $
6,846 $
4,775 $
3,419 $
2,946
36
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,
2020
2019
2018
2017
2016
(in thousands)
$ 139,878 $
29,168 $
26,552 $
25,706 $
23,637
89,862
186,628
498,250
—
158,311
439,007
69,732
67,196
54,559
54,773
37,590
40,692
257,200
207,510
105,859
26,086
120,440
232,731
12,862
78,337
9,324
57,425
219,838
134,511
129,574
29,570
34,729
82,345
4,767
37,630
(91,360)
(85,520)
(83,711)
(82,784)
(81,281)
339,939
136,760
129,173
48,434
44,715
Year Ended December 31,
2020
2019
2018
2017
2016
Total pets enrolled (at period end)
862,928
646,728
521,326
423,194
343,649
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
577,957
494,026
430,770
371,683
323,233
$ 60.37
$ 57.52
$ 54.34
$ 52.07
$ 47.82
$
$
653
247
$
$
523
212
$
$
449
164
$
$
409
152
$
$
290
123
98.71 %
98.58 %
98.60 %
98.63 %
98.6 %
(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.”
37
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 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.
Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 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, 2019.
Overview
We provide medical insurance for cats and dogs throughout the United States, Canada, Puerto Rico, and Australia. Our data-
driven, vertically-integrated approach enables us to provide pet owners with products that offer what we believe is the highest
value medical insurance, priced specifically for each pet’s unique characteristics and coverage level. 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 acquiring as many pets as possible at our targeted average estimated internal rate of return.
We operate in two business segments: subscription business and other business. We currently generate revenue in our
subscription business segment from subscription fees for our “Trupanion” branded products. 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
primarily 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 other products
and software solutions that have a different margin profile from our subscription business.
We generate leads primarily for our subscription business segment 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. 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 targeted return on investment.
Our Response to the COVID-19 Pandemic
Due to the uncertainty caused by the COVID-19 pandemic, we continue to:
•
•
•
•
Protect our team. We instituted a work-from-home policy for substantially all employees in early March. This allowed
responsible social distancing to keep our team safe. We are also providing technology support, training and other
resources to support our team members during this unique time.
Leverage our data about COVID-19. There has been understandable concern about whether COVID-19 is
communicable to and from pets. Using our extensive, proprietary database, we have closely monitored veterinary
invoice data and shared our data with veterinarians, our members and the broader community that, to date, we have not
seen any material COVID-19-related veterinary invoices.
Provide relief and support to members. We value our members and understand the economic and health challenges
COVID-19 has created for many of them. We slowed our process on subscription cancellations related to payments
that fail, reverting to our historical 60-day process. We estimate approximately 1,300 cancellations were shifted from
the second quarter into the third quarter due to this change. We also continue to provide a superior member experience
with our claims, call center and broader team working to ensure pets receive the care they need during this pandemic.
Carefully monitor the financial impact to our business. We have not experienced a material adverse impact on our
business due to COVID-19, but we are carefully monitoring new enrollments and retention, veterinary invoice
expense, and other expenses, as well as the impact of COVID-19 on our partners.
The impacts of COVID-19 and related economic conditions on our results are highly uncertain and in many ways outside of our
control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that
are difficult, if possible, to anticipate.
38
Key Operating Metrics
The following tables set forth our key operating metrics for the periods ended December 31, 2020, 2019 and 2018, 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
Year Ended December 31,
2020
2019
2018
862,928
646,728
521,326
577,957
60.37
653
247
$
$
$
494,026
57.52
523
212
$
$
$
430,770
54.34
449
164
$
$
$
98.71 %
98.58 %
98.60 %
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,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Period Ended
862,928
804,251
744,727
687,435
646,728
613,694
577,686
548,002
577,957
552,909
529,400
508,480
494,026
479,427
461,314
445,148
$ 62.03
$ 60.87
$ 59.40
$ 58.96
$ 58.58
$ 58.12
$ 57.11
$ 56.13
$ 653
$ 615
$ 597
$ 535
$ 523
$ 511
$ 482
$ 471
$ 272
$ 261
$ 199
$ 247
$ 222
$ 208
$ 213
$ 205
98.71 % 98.69 % 98.66 % 98.59 % 98.58 % 98.59 % 98.57 % 98.58 %
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.
39
Lifetime value of a pet, including fixed expenses. Lifetime value of a pet, including fixed expenses, is calculated based on
subscription revenue less cost of revenue 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 and development expenses,
less stock-based compensation, 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.
Average pet acquisition cost. Average pet acquisition cost (PAC) is calculated as net acquisition cost divided by the total
number of new subscription pets enrolled in that period. Net acquisition cost, a non-GAAP financial measure, is calculated in a
reporting period as sales and marketing expense, excluding stock-based compensation expense and other business segment sales
and marketing expense, offset by sign-up fee revenue. We exclude stock-based compensation expense because the amount
varies from period to period based on number of awards issued and market-based valuation inputs. We offset sign-up fee
revenue because it is a one-time charge to new members collected at the time of enrollment used to partially offset initial setup
costs, which are included in sales and marketing expenses. We exclude other business segment sales and marketing expense
because that does not relate to subscription enrollments. We monitor average pet acquisition cost to evaluate the efficiency of
our sales and marketing programs in acquiring new members and measure effectiveness using the ratio of our lifetime value of
a pet to average pet acquisition cost, based on our desired return on investment.
Average monthly retention. Average monthly retention is measured as the monthly retention rate of enrolled subscription pets
for each applicable period averaged over the 12 months prior to the period end date. As such, our average monthly retention
rate as of December 31, 2020 is an average of each month’s retention from January 1, 2020 through December 31, 2020. 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 reconcile net acquisition cost to sales and marketing expense (in thousands) for the years ended December
31, 2020, 2019, and 2018, and for each of the last eight fiscal quarters:
Sales and marketing expense
Net of sign-up fee revenue
Excluding:
Year Ended December 31,
2020
2019
2018
$
47,837 $
(3,292)
35,451 $
(2,957)
24,999
(2,587)
Stock-based compensation expense
Other business segment sales and marketing expense
Net acquisition cost
(2,773)
(820)
$
40,952 $
(2,120)
(414)
29,960 $
(1,335)
(377)
20,700
40
Sales and marketing
expense
Net of sign-up fee
revenue
Excluding:
Stock-based
compensation expense
Other business
segment sales and
marketing expense
Dec. 31,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Period Ended
$ 14,809 $ 13,344 $ 9,242 $ 10,442 $
9,212 $
9,255 $ 8,757 $ 8,227
(919)
(827)
(781)
(765)
(730)
(790)
(734)
(703)
(801)
(741)
(675)
(556)
(547)
(577)
(567)
(429)
(201)
(265)
(191)
(163)
(152)
(94)
(38)
(130)
Net acquisition cost
$ 12,888 $ 11,511 $ 7,595 $
8,958 $
7,783 $
7,794 $ 7,418 $ 6,965
Components of Operating Results
General
We operate in two business segments: subscription business and other business. We currently generate revenue in our
subscription business segment from subscription fees related to our “Trupanion” branded products. Our other business segment
includes revenue from other product offerings that generally have a business-to-business relationship and different margin
profiles than our subscription segment, including revenue from writing policies on behalf of third parties and revenue from
other products and software solutions.
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 also includes revenue from other products and software solutions which
have a different margin profile than our subscription business.
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 four categories: technology and development, general and administrative, sales and
marketing, and depreciation and amortization. For each category, excluding depreciation and amortization, 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, including third-party services. It
also includes expenses associated with development of new products and offerings.
41
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.
Depreciation and amortization
Depreciation and amortization expenses consist of depreciation of property, equipment, and internally-developed
software, as well as amortization of finite-lived intangible assets.
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.
42
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, improve our technology, 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 profitability 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 from other product offerings that
generally have a business-to-business relationship. This segment includes products that have been in the past, and may be in the
future, materially different from our subscription segment. 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.
43
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.
Revenue:
Subscription business
Other business
Total revenue
Cost of revenue:
Subscription business(1)
Other business
Total cost of revenue
Operating expenses:
Technology and development(1)
General and administrative(1)
Sales and marketing(1)
Depreciation and amortization
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:
Year Ended December 31,
2020
2019
2018
(in thousands)
$
387,732 $
321,163 $
263,738
114,296
502,028
314,875
105,252
420,127
9,947
21,847
47,837
7,071
86,702
62,773
383,936
262,139
56,873
319,012
7,025
18,384
35,451
5,632
66,492
(126)
(4,927)
1,381
(581)
(5,727)
113
(352)
(1,920)
1,349
(1,629)
(1,640)
169
$
(5,840) $
(1,809) $
40,218
303,956
215,992
36,598
252,590
5,796
17,104
24,999
4,512
52,411
—
(1,045)
1,198
(1,309)
(934)
(7)
(927)
Year Ended December 31,
2020
2019
2018
Cost of revenue
Technology and development
General and administrative
Sales and marketing
(in thousands)
$
1,586 $
1,050 $
758
3,795
2,773
364
3,312
2,120
Total stock-based compensation expense
$
8,912 $
6,846 $
927
209
2,304
1,335
4,775
44
Revenue
Cost of revenue
Operating expenses:
Technology and development
General and administrative
Sales and marketing
Depreciation and amortization
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
Subscription business revenue
Subscription business cost of revenue
Year Ended December 31,
2020
2019
2018
(as a percentage of revenue)
100 %
84
2
4
10
1
17
—
(1)
—
—
(1)
—
100 %
83
100 %
83
2
5
9
1
17
—
(1)
—
—
—
—
2
6
8
1
17
—
—
—
—
—
—
(1) %
— %
— %
Year Ended December 31,
2020
2019
2018
(as a percentage of subscription revenue)
100 %
81
100 %
82
100 %
82
Comparison of the years ended December 31, 2020, 2019, and 2018
Revenue
Revenue:
Subscription business
Other business
Total revenue
Percentage of Revenue by Segment:
Subscription business
Other business
Total revenue
Year Ended December 31,
Change
2020
2019
2018
2020 vs. 2019
2019 vs. 2018
(in thousands, except percentages, pet and per pet data)
$
387,732
$
321,163
$
263,738
114,296
62,773
40,218
$
502,028
$
383,936
$
303,956
21%
82
31
22%
56
26
77 %
23
100 %
84 %
16
100 %
87 %
13
100 %
Total pets enrolled (at period end)
Total subscription pets enrolled (at period end)
Monthly average revenue per pet
$
Average monthly retention
862,928
577,957
60.37
98.71 %
$
646,728
494,026
57.52
98.58 %
$
521,326
430,770
54.34
98.60 %
33
17
5
24
15
6
45
Year ended December 31, 2020 compared to year ended December 31, 2019. Total revenue increased by $118.1 million to
$502.0 million for the year ended December 31, 2020, or 31%. Revenue from our subscription business segment increased by
$66.6 million to $387.7 million for the year ended December 31, 2020, or 21%. This increase was primarily due to a 17%
increase in total subscription pets enrolled as of December 31, 2020 compared to December 31, 2019 and increased average
revenue per pet of 5% 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 $51.5 million to $114.3 million for the year ended December 31, 2020,
or 82%, primarily due to the increase in enrolled pets in this segment, as well as $1.2 million in revenue from the newly
acquired software business in the fourth quarter of 2020.
Cost of Revenue
Cost of Revenue:
Subscription business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Other business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Percentage of Revenue by Segment:
Subscription business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Other business:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Year Ended December 31,
Change
2020
2019
2018
2020 vs. 2019
2019 vs. 2018
(in thousands, except percentages, pet and per pet data)
$
279,005
$
232,415
$
191,051
20%
22%
35,870
314,875
72,119
33,133
105,252
29,724
262,139
24,941
215,992
38,532
18,341
56,873
23,488
13,110
36,598
21
20
87
81
85
72 %
72 %
72 %
9
81
63
29
92
9
82
61
29
91
9
82
58
33
91
19
21
64
40
55
24
15
6
Total pets enrolled (at period end)
Total subscription pets enrolled (at period end)
862,928
577,957
646,728
494,026
521,326
430,770
Monthly average revenue per pet
$
60.37
$
57.52
$
54.34
33
17
5
Year ended December 31, 2020 compared to year ended December 31, 2019. Cost of revenue for our subscription business
segment was $314.9 million, or 81% of revenue, for the year ended December 31, 2020, compared to $262.1 million, or 82%,
of revenue for the year ended December 31, 2019. This $52.7 million increase in subscription cost of revenue was primarily the
result of a 17% increase in subscription pets enrolled and an increase of 4% 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 $48.4
million to $105.3 million for the year ended December 31, 2020, primarily due to the increase in enrolled pets in this segment.
46
Technology and Development Expenses
Year Ended December 31,
Change
2020
2019
2018
2020 vs. 2019
2019 vs. 2018
(in thousands, except percentages)
Technology and development
$
9,947
$
7,025
$
5,796
42%
21%
Percentage of total revenue
2 %
2 %
2 %
Year ended December 31, 2020 compared to year ended December 31, 2019. Technology and development expenses increased
by $2.9 million, or 42%, to $9.9 million for the year ended December 31, 2020. The change was primarily due to a $1.6 million
increase in compensation and third party contractor expenses, net of capitalization, and a $1.1 million increase in software and
IT system expenditures. Technology and development expenses remained consistent at 2% as a percentage of revenue year over
year.
General and Administrative Expenses
Year Ended December 31,
Change
2020
2019
2018
2020 vs. 2019
2019 vs. 2018
(in thousands, except percentages)
General and administrative
Percentage of total revenue
$
21,847
$
18,384
$
17,104
19%
7%
4 %
5 %
6 %
Year ended December 31, 2020 compared to year ended December 31, 2019. General and administrative expenses increased
by $3.5 million, or 19%, to $21.8 million for the year ended December 31, 2020. The change was primarily due to a $2.1
million increase in compensation expenses, a $0.6 million increase in operating expenses related to the home office building,
and a $0.5 million increase in business acquisition transaction costs. General and administrative expenses decreased from 5% to
4% as a percentage of revenue year over year, 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
2020
2019
2018
2020 vs. 2019
2019 vs. 2018
$
47,837
$
35,451
$
24,999
35%
42%
(in thousands, except pet and per pet data)
10 %
9 %
8 %
Total subscription pets enrolled (at period
end)
Average pet acquisition cost (PAC)
577,957
247
$
494,026
212
$
430,770
164
$
17
17
15
29
Year ended December 31, 2020 compared to year ended December 31, 2019. Sales and marketing expense increased by $12.4
million, or 35%, to $47.8 million, for the year ended December 31, 2020. The change consisted primarily of an increase of $4.5
million in compensation expense and an increase of $9.1 million in other sales and marketing expenses to generate leads and
increase conversion rates, partially offset by a $1.2 million decrease in travel and conference expenses. We increased our pet
acquisition spend during 2020 to drive new pet enrollments and future growth. As a result, sales and marketing expenses as a
percentage of revenue increased slightly compared to 2019.
47
Depreciation and Amortization
Year Ended December 31,
Change
2020
2019
2018
2020 vs. 2019
2019 vs. 2018
(in thousands, except percentages)
Depreciation and amortization
$
7,071
$
5,632
$
4,512
26%
25%
Percentage of total revenue
1 %
1 %
1 %
Depreciation and amortization expenses have been reclassified as a separate line item in the consolidated statement of operation
and prior period amounts have been reclassified from their original presentation to conform to the current period presentation.
We elected to present depreciation and amortization expenses as a separate line to better align with management's view of our
operating results.
Year ended December 31, 2020 compared to year ended December 31, 2019. Depreciation and amortization expense increased
by $1.4 million, or 26%, primarily due to the $0.7 million incremental amortization expense as a result of acquired intangible
assets from the Aquarium acquisition and an additional $0.7 million as a result of overall business growth.
Year ended December 31, 2019 compared to year ended December 31, 2018. Depreciation and amortization expense increased
by $1.1 million, or 25%, primarily related to the depreciation associated with our home office building, which was purchased in
August 2018.
Total Other (Income) Expense, Net
Interest expense
Other income, net
Total other (income) expense, net
Year Ended December 31,
2020
2019
2018
(in thousands)
$
$
1,381 $
1,349 $
(581)
(1,629)
800 $
(280) $
1,198
(1,309)
(111)
Year ended December 31, 2020 compared to year ended December 31, 2019. Total other (income) expense, net increased by
$1.1 million, primarily due to less interest income as a result of lower interest rates compared to the prior year.
48
Quarterly Results of Operations
The following tables contain selected quarterly financial information for the years ended December 31, 2020 and 2019. 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,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
(in thousands)
Revenue:
Subscription business
$ 106,416 $ 99,379 $ 92,453 $ 89,484 $ 86,592 $ 82,613 $ 77,736 $ 74,222
Other business
36,271
30,741
25,467
21,817
18,891
Total revenue
142,687
130,120
117,920
111,301
105,483
16,663
99,276
14,463
92,199
12,756
86,978
Cost of revenue:
Subscription business(1)
Other business
85,761
33,333
81,098
28,433
Total cost of revenue
119,094
109,531
Operating expenses:
Technology and
development(1)
General and administrative(1)
Sales and marketing(1)
Depreciation and
amortization
Total operating expenses
Gain (loss) from investment in
joint venture
74,594
23,459
98,053
2,293
5,073
9,242
73,422
20,027
93,449
2,120
4,860
10,442
70,718
17,031
87,749
66,770
15,061
81,831
64,264
13,222
77,486
60,387
11,559
71,946
1,928
4,665
9,212
1,705
4,388
9,255
1,663
4,585
8,757
1,729
4,746
8,227
3,108
6,502
2,426
5,412
14,809
13,344
2,301
1,666
1,723
1,381
1,275
1,195
1,549
1,613
26,720
22,848
18,331
18,803
17,080
16,543
16,554
16,315
(42)
2
(27)
(59)
Operating income (loss)
(3,169)
(2,257)
1,509
(1,010)
Interest expense
Other income, net
Income (loss) before income
taxes
337
(48)
324
(49)
341
(202)
379
(282)
(3,458)
(2,532)
1,370
(1,107)
Income tax expense (benefit)
44
26
17
26
(21)
633
375
(59)
843
340
(535)
(297)
(272)
—
(2,113)
(1,283)
317
(453)
317
(344)
793
157
800
18
(1,977)
(1,256)
(46)
40
Net income (loss)
$
(3,502) $
(2,558) $
1,353 $
(1,133) $
636 $
782 $
(1,931) $
(1,296)
(1) Includes stock-based compensation expense as follows (in thousands):
Dec. 31,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Three Months Ended
(in thousands)
Cost of revenue
$
526 $
448 $
344 $
268 $
267 $
258 $
278 $
392
883
801
133
1,108
741
133
1,075
675
100
729
556
97
860
547
94
916
577
110
918
567
247
63
618
429
Technology and development
General and administrative
Sales and marketing
Total stock-based
compensation expense
$ 2,602 $ 2,430 $ 2,227 $ 1,653 $ 1,771 $ 1,845 $ 1,873 $ 1,357
49
Dec. 31,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
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)
862,928
804,251
744,727
687,435
646,728
613,694
577,686
548,002
577,957
552,909
529,400
508,480
494,026
479,427
461,314
445,148
$ 62.03
$ 60.87
$ 59.40
$ 58.96
$ 58.58
$ 58.12
$ 57.11
$ 56.13
$
653
$
615
$
597
$
535
$
523
$
511
$
482
$
471
$
272
$
261
$
199
$
247
$
222
$
208
$
213
$
205
Average monthly retention
98.71 %
98.69 %
98.66 %
98.59 %
98.58 %
98.59 %
98.57 %
98.58 %
Three Months Ended
Dec. 31,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
(as a percentage of revenue)
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
83
84
83
84
83
82
84
83
2
5
10
2
19
—
(2)
—
—
(2)
—
2
4
10
1
18
—
(2)
—
—
(2)
—
2
4
8
1
16
—
1
—
—
1
—
2
7
9
1
17
—
(1)
—
—
(1)
—
2
4
9
1
16
—
1
—
(1)
1
—
2
4
9
1
17
—
1
—
—
1
—
2
5
9
2
18
—
(2)
—
—
(2)
—
2
5
8
2
19
—
(3)
—
—
(1)
—
Revenue
Cost of revenue
Operating expenses:
Technology and
development
General and administrative
Sales and marketing
Depreciation and
amortization
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)
(2) %
(2) %
1 %
(1) %
1 %
1 %
(2) %
(1) %
Dec. 31,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
(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
81
82
81
82
82
81
83
81
50
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
Year Ended December 31,
2020
2019
2018
$
21,544 $
16,157 $
12,680
(76,747)
170,848
(16)
(28,008)
14,044
423
(81,451)
71,229
(812)
1,646
Net change in cash, cash equivalents, and restricted cash
$
115,629 $
2,616 $
As of December 31, 2020, we had $229.7 million in cash, cash equivalents and short-term investments. 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, 2020, total assets and liabilities held
outside of our insurance entities were $259.3 million and $29.4 million, respectively, including $6.7 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. For further information, refer to "—Regulation".
Our primary sources of liquidity are our existing cash, cash equivalents and short-term investments, as well as cash provided by
operations. We believe these sources are sufficient to fund our operations and capital requirements for the next 12 months. As
we continue to grow and consider strategic opportunities, 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.
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. In December 2020, we
elected to terminate our line of credit facility and repaid all then outstanding obligations.
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. Net cash provided by operating activities was $21.5 million for the year
ended December 31, 2020, compared to cash provided by operating activities of $16.2 million for the year ended December 31,
2019. The change 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 and deferred revenue were primarily related to annual policies with monthly payment terms within our
other business segment.
Investing Cash Flows
Net cash used in investing activities was $76.7 million for the year ended December 31, 2020. The year over year increase of
$48.7 million was primarily due to the Aquarium acquisition. As of December 31, 2020, we had $95.4 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.
Financing Cash Flows
Net cash provided by financing activities was $170.8 million and $14.0 million for the years ended December 31, 2020 and
2019, respectively.
In October 2020, we entered into a Strategic Alliance Agreement, Shareholder Agreement, and a Stock Purchase Agreement
with Aflac Incorporated (Aflac). To drive long-term alignment, Aflac invested $200.0 million cash in exchange for 3,636,364
newly issued shares of our common stock at a price of $55 per share, subject to a minimum holding period of three years.
The increase in net cash provided by financing activities of $156.8 million was primarily due to net proceeds of $192.3 million
received from the sale of common stock to Aflac, partially offset by repayment and termination of the line of credit facility.
51
Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal course of business, primarily non-cancellable
vendor service agreements. Refer to Note 9, Commitments and Contingencies, included in Item 8 of Part II of this 10-K, for
contractual commitments and obligations as of December 31, 2020.
Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported revenue and
expenses during the reporting periods.
Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial
condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of
the need to make estimates about the effect of matters that are inherently uncertain. Generally, we base our estimates on
historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates.
Reserve for Veterinary Invoices
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, 2020, our reserve for veterinary invoices was $28.9 million, consisting of $26.5 million for the amount we
expect to pay in the future for veterinary invoices dated between January 1, 2020 and December 31, 2020, inclusive of related
processing costs, and a reserve of $2.4 million for invoices dated prior to January 1, 2020. We believe the reserve amount as
of December 31, 2020 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.
52
For the year ended December 31, 2020, we paid $18.8 million for veterinary invoices dated on or before December 31, 2019,
including related processing costs. Our reserve estimate for these expenses was $21.2 million as of December 31, 2019. As of
December 31, 2020, we reevaluated the remaining reserve for those periods prior to December 31, 2019 and recorded an
adjustment to our income statement to increase it by $0.1 million.
Accounting for business acquisition
As discussed in Item 8, Note 3—Business Combination, we acquired 100% of the equity of Aquarium Software Limited
(Aquarium) for a total consideration of approximately $48.3 million in net cash on October 30, 2020. Accounting for business
acquisition requires us to make certain estimates and assumptions, especially at the acquisition date with respect to tangible and
intangible assets acquired and liabilities assumed. We used our best estimates and assumptions to accurately assign fair value to
the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those
acquired intangible assets. We used a discounted cash flow model to measure the acquired intangible assets. The key
assumptions used to estimate the fair value of the intangible assets included discount rates and certain assumptions that form the
basis of the forecasted results. These key assumptions are forward looking and could be affected by future economic and market
conditions. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions,
estimates or actual results.
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.
53
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 may be exposed to interest rate risk as a result of our debt and our investment activities. We elected to terminate our line of
credit facility in December 2020 and repaid all of the outstanding obligations. 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 16% 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 $8.1 million, total expenses by approximately $5.2 million, and
have a net impact of $2.9 million of income or loss for the year ended December 31, 2020. To date, we have not entered into
any material foreign currency hedging contracts although we may do so in the future.
54
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
56
59
60
61
62
63
64
55
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, 2020
and 2019, 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, 2020, 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,
2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2020, 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, 2020, 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 11, 2021 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 matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters 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 matters below, providing a separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
56
Description of the Matter
How We Addressed the
Matter in Our Audit
Reserve for Veterinary Invoices
The Company’s reserve for veterinary invoices totaled $28.9 million as of December
31, 2020. 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.
57
Business Combination
Description of the Matter
During 2020, the Company completed its acquisition of Aquarium Software Limited
(Aquarium) for consideration of $48.3 million, as disclosed in Note 3 to the
consolidated financial statements. The transaction was accounted for as a business
combination.
Auditing the Company's accounting for its acquisition of Aquarium was complex
due to the estimation uncertainty in the Company’s determination of the fair value of
identified intangible assets of $19.5 million, which principally consisted of
developed technology and customer relationships. The estimation uncertainty was
primarily due to the sensitivity of the respective fair values to underlying
assumptions about the future performance of the acquired business on which those
assumptions were based. The Company used a discounted cash flow model to
measure the developed technology and customer relationships intangible assets. The
key assumptions used to estimate the fair value of the intangible assets included
discount rates and certain assumptions that form the basis of the forecasted results
(e.g., revenue growth and attrition rates). These significant assumptions are forward
looking and could be affected by future economic and market conditions.
How We Addressed the
Matter in Our Audit
We tested the Company's controls over its accounting for acquisitions. Our tests
included controls over the estimation process supporting the recognition and
measurement of consideration transferred, and technology and customer-related
intangible assets. We also tested management’s review of assumptions used in the
valuation models.
To test the estimated fair value of the technology and customer-related intangible
assets, we performed audit procedures that included, among others, evaluating the
Company's selection of the valuation methodology, evaluating the methods and
significant assumptions used by the Company's valuation specialist, and evaluating
the completeness and accuracy of the underlying data supporting the significant
assumptions and estimates. We involved our valuation specialists to assist with our
evaluation of the methodology used by the Company and significant assumptions
included in the fair value estimates. For example, we compared the key assumptions
to third-party industry projections for similar market participants. Specifically, when
assessing the key assumptions, we focused on revenue growth rates, attrition
assumptions and basis for the discount rate used.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Seattle, Washington
February 11, 2021
58
Trupanion, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Revenue
Cost of revenue:
Veterinary invoice expense
Other cost of revenue
Total cost of revenue
Operating expenses:
Technology and development
General and administrative
Sales and marketing
Depreciation and amortization
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,
2020
2019
2018
$
502,028 $
383,936 $
303,956
351,124
69,003
420,127
9,947
21,847
47,837
7,071
86,702
(126)
(4,927)
1,381
(581)
(5,727)
113
270,947
48,065
319,012
7,025
18,384
35,451
5,632
66,492
(352)
(1,920)
1,349
(1,629)
(1,640)
169
$
(5,840) $
(1,809) $
214,539
38,051
252,590
5,796
17,104
24,999
4,512
52,411
—
(1,045)
1,198
(1,309)
(934)
(7)
(927)
$
(0.16) $
(0.05) $
(0.03)
35,858,869
34,645,345
31,961,192
59
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,
2020
2019
2018
$
(5,840) $
(1,809) $
(927)
2,496
325
2,821
359
644
1,003
(642)
(19)
(661)
$
(3,019) $
(806) $
(1,588)
60
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
Goodwill
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,
2020 and December 31, 2019, 40,383,972 and 39,450,807 shares issued and outstanding at
December 31, 2020; 35,876,882 and 34,947,017 shares issued and outstanding at December 31,
2019
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31,
2020 and December 31, 2019, and 0 shares issued and outstanding at December 31, 2020 and
December 31, 2019
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Treasury stock, at cost: 933,165 shares at December 31, 2020 and 929,865 shares at December 31,
2019
Total stockholders’ equity
Total liabilities and stockholders’ equity
61
December 31,
2020
2019
$
139,878 $
89,862
99,065
8,222
29,168
69,732
54,408
5,513
337,027
158,821
6,319
5,566
72,602
27,134
16,557
33,045
1,400
4,323
70,372
7,731
14,553
—
$
498,250 $
257,200
$
6,059 $
22,864
28,929
92,547
150,399
—
4,705
3,207
4,087
13,798
21,194
52,546
91,625
26,086
1,118
1,611
158,311
120,440
—
—
439,007
3,071
(91,360)
(10,779)
339,939
$
498,250 $
—
—
232,731
250
(85,520)
(10,701)
136,760
257,200
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Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2019
2018
2020
$
(5,840) $
(1,809) $
(927)
Operating activities
Net loss
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization
Stock-based compensation expense
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
Cash paid in business acquisition, net of cash acquired
Purchases of other investments
Acquisition of lease intangibles, related to corporate real estate acquisition
Purchases of property and equipment
Other
Net cash used in investing activities
Financing activities
Issuance 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 (refund)
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
Acquisition-related contingent consideration recorded as a liability
$
$
$
63
7,071
8,912
153
(43,272)
(2,839)
9,951
7,662
39,746
21,544
(65,286)
44,066
(48,133)
—
—
(7,451)
57
(76,747)
192,265
6,013
(1,115)
6,213
(32,450)
(78)
170,848
(16)
115,629
30,568
146,197 $
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 $
(31) $
158 $
1,363
1,188
—
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4,500
—
861
162 $
485
— $
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
106
—
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, Puerto Rico, and Australia. The Company's data-driven, vertically-integrated approach
enables the Company to provide pet owners with products that the Company believes are the highest value medical insurance,
priced specifically for 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
Depreciation and amortization expenses have been reclassified as a separate line item in the consolidated statement of
operations and prior period amounts have been reclassified from their original presentation to conform to the current period
presentation. The Company has elected to present depreciation and amortization expenses as a separate line to better align with
management's view of the Company's operating results.
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 required to maintain certain restricted cash balance to comply with insurance company regulations. As of
December 31, 2020, 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
$94.2 million and $50.0 million accounts receivable associated with underwriting these policies as of December 31, 2020 and
2019, 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, 2020 and 2019 were $2.9 million and $1.8 million, respectively. Amortized deferred acquisition costs classified
within sales and marketing amounted to $3.2 million, $2.5 million, and $2.1 million and amortized deferred acquisition costs
classified within other cost of revenue amounted to $23.2 million, $19.2 million, and $15.9 million, for the years ended
December 31, 2020, 2019, and 2018, respectively.
64
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.
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 8, 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
Goodwill and Intangible Assets
Not depreciable
10 years
39 years
3 to 5 years
3 to 5 years
Goodwill and indefinite-lived intangible assets are not amortized. The Company reviews these assets for impairment at least
annually or if indicators of potential impairment exist. Acquired finite-lived intangibles are amortized on a straight-line basis
over the estimated useful lives of the assets.
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, 2020, 2019, and 2018.
65
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.
Deferred Revenue
Deferred revenue 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. Deferred revenue also consists of subscription fees received or billed in
advance of the subscription services within the Company's subscription business.
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 or paid. 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 and costs to administer the programs in the
other business 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. It also includes
expenses associated with development of new products and offerings.
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, Net
Other income, net, was $0.6 million, $1.6 million, and $1.3 million, including interest income of $0.6 million, $1.7 million, and
$0.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Advertising
Advertising costs are expensed as incurred, with the exception of television advertisements, which are expensed the first time
each advertisement is aired. Advertising costs amounted to $13.4 million, $7.8 million and $6.3 million, in the years ended
December 31, 2020, 2019 and 2018, respectively.
66
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 $(2.1) million, $0.4 million, and $0.7 million were recorded in
accumulated other comprehensive loss as of December 31, 2020, 2019, and 2018, 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.
67
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 2020, 2019, and 2018 was $81.3 million, $67.5 million and $57.4 million,
respectively, and deferred revenue relating to this arrangement at December 31, 2020 and 2019 was $3.6 million and $2.7
million, respectively. Reinsurance revenue was 16%, 18%, and 19% of total revenue in 2020, 2019, and 2018, respectively.
Cash designated for the purpose of paying claims related to this reinsurance agreement was $6.5 million and $4.6 million at
December 31, 2020 and 2019, 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 120% of unearned Canadian premium plus 20% of outstanding Canadian
claims, including all incurred but not reported claims. As of December 31, 2020, the account balance was CAD $5.8 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) 2016-13, Financial Instruments—Credit Losses (Topic 326), using
the modified retrospective approach on January 1, 2020. The ASU replaces the incurred loss impairment methodology with a
methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for
accounts receivables, loans, and other financial instruments. The new standard did not have a material impact on the Company's
consolidated statements of operations, balance sheets, stockholders' equity, or cash flows. The Company did not record any
cumulative-effect adjustment to its retained earnings upon the adoption.
2. Net Loss per Share
Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the
period. Diluted net loss per share is calculated using the weighted-average number of shares of common stock plus, when
dilutive, potential common shares outstanding using the treasury-stock method. Potential common shares outstanding include
stock options, unvested restricted stock awards and restricted stock units, and warrants.
The following potentially dilutive equity securities were not included in the diluted earnings per common share calculation
because they would have had an antidilutive effect:
Stock options
Restricted stock awards and restricted stock units
Warrants
As of December 31,
2020
2019
2018
1,459,290
2,097,978
2,621,503
782,755
581,943
—
—
451,160
480,000
68
3. Business Combination
On October 30, 2020, the Company completed an acquisition of 100% of the equity of Aquarium Software Limited
(Aquarium), a U.K.-based insurance software provider, for approximately $48.3 million in net cash. The acquired technology
from Aquarium focuses on the pet space and, along with the acquired personnel, is intended to enable the Company to improve
its back-end software to help facilitate growth opportunities. The Company incurred $0.5 million of acquisition related costs
that were included in general and administrative expenses during the year ended December 31, 2020.
The acquisition is recorded using the purchase method of accounting in accordance with ASC 805, Business Combinations,
which requires that the assets acquired and liabilities assumed to be recorded at their respective fair values at the acquisition
date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is
recorded as goodwill. The application of the purchase method of accounting resulted in the recognition of intangible assets, the
estimated fair values of which involved a discounted cash flow model and certain assumptions and estimates, including but not
limited to, revenue growth rates and margins, attrition rates, and discount rates. These estimates are inherently uncertain and
unanticipated events and circumstances may occur which could affect the accuracy or validity of estimates used in purchase
accounting. The purchase price allocation recorded in a business combination may change during the measurement period,
which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the
acquisition date becomes available.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the
acquisition date (in thousands):
Current assets, net of cash acquired
Property and equipment
Amortizable intangible assets
Goodwill
Other long-term assets
Current liabilities
Deferred tax liability and other liabilities
Total Consideration Transferred, net of cash acquired
December 31,
2020
1,469
171
19,512
31,352
1,421
(1,269)
(4,361)
48,295
$
$
Acquired intangible assets included trade name, developed technologies, and customer relationships. These definite-lived
intangible assets had weighted-average estimated useful lives of approximately 5.3 years. The goodwill recognized is
attributable primarily to going concern value such as assembled workforce, future technology development, future customers,
and expected synergies from incorporating the operations into Trupanion’s portfolio. None of the goodwill associated with this
acquisition is expected to be deductible for income tax purposes.
The results of Aquarium’s operations have been included in the consolidated financial statements since the acquisition date, but
were immaterial to the Company's consolidated financial statements.
4. 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
69
December 31,
2020
2019
$
15,854 $
46,682
27,707
4,146
2,855
97,244
(24,642)
72,602 $
$
15,854
47,558
22,976
3,384
247
90,019
(19,647)
70,372
Depreciation expense related to property and equipment was $5.2 million, $4.7 million and $4.3 million for the years ended
December 31, 2020, 2019 and 2018, 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.
5. Goodwill and Intangible Assets
Goodwill arises from business acquisitions in which the purchase price exceeds the fair value of tangible and intangible assets
acquired less assumed liabilities. As discussed in Note 3—Business Combination, the Company recognized $31.4 million in
goodwill on October 30, 2020. The carrying amount of goodwill as of December 31, 2020 was $33.0 million, due to a foreign
exchange translation fluctuation of $1.6 million between the acquisition date and December 31, 2020.
The following table presents the detail of intangible assets other than goodwill for the periods presented (in thousands):
December 31, 2020:
Licenses
Leases
Trade name
Developed technologies
Customer relationships
Patents, trademarks, and other
Total Intangibles
December 31, 2019:
Licenses
Leases
Patents, trademarks, and other
Total Intangibles
Gross Carrying
Value
Accumulated
Amortization
Net Carrying Value
$
4,773 $
— $
2,959
1,387
11,512
7,667
2,037
(2,213)
(23)
(352)
(256)
(357)
$
$
$
30,335 $
(3,201) $
4,773 $
2,959
1,287
9,019 $
— $
(1,084)
(204)
(1,288) $
4,773
746
1,364
11,160
7,411
1,680
27,134
4,773
1,875
1,083
7,731
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 2.4 years. Intangible assets acquired from the Aquarium acquisition
included trade name, developed technologies, and customer relationships. These definite-lived intangible assets have a
remaining weighted-average useful life of 5.1 years. Patents, trademarks, and other intangible assets have a remaining
weighted-average useful life of 6.3 years.
Amortization expense associated with intangible assets was $1.9 million, $0.9 million, and $0.2 million for the years ended
December 31, 2020, 2019, and 2018, respectively.
70
As of December 31, 2020, 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:
2021
2022
2023
2024
2025
Thereafter
Total
6. Investments
$
$
4,725
4,692
4,359
3,982
3,288
905
21,951
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, 2020 and 2019 (in thousands):
As of December 31, 2020
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, 2019
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
$
$
$
4,564 $
1,000
5,564 $
— $
2
2 $
— $
—
— $
6,494 $
— $
(2) $
1,696
81,672
—
—
—
—
$
89,862 $
— $
(2) $
4,564
1,002
5,566
6,492
1,696
81,672
89,860
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
$
$
$
3,323 $
1,000
4,323 $
— $
—
— $
— $
—
— $
6,156 $
— $
(1) $
440
63,136
—
—
—
—
$
69,732 $
— $
(1) $
3,323
1,000
4,323
6,155
440
63,136
69,731
71
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, 2020
Amortized
Cost
Fair
Value
$
$
5,564
5,564
$
$
5,566
5,566
The Company does not expect any credit losses from its held-to-maturity investments, considering the composition of the
investment portfolio and the credit loss history of these investments. For available-for-sale debt securities, the Company
determined that the unrealized losses were immaterial and due to non-credit factors. 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.
7. Other Investments
Investment in Variable Interest Entity
The Company has invested $7.0 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 the variable
interest entity and is, therefore, not the primary beneficiary. The Company has the option to purchase all of the outstanding
common shares issued by the variable interest entity in 2023 at an amount approximating its expected fair value. The preferred
stock investment in the variable interest entity is accounted for as an available-for-sale debt security, and measured at fair value
at each balance sheet date.
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 its consolidated balance sheet. The outstanding loan balance under the line of credit was $2.5 million as of
December 31, 2020 and 2019. The Company has also entered into a series of agreements to provide ancillary services to the
variable interest entity at cost. The Company provided $1.2 million and $1.4 million of these services for the years ended
December 31, 2020 and 2019, 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 in Australia, 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, 2020, 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.
72
8. Fair Value
Investments
The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring
basis, and placement within the fair value hierarchy (in thousands):
Assets
Restricted cash
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, 2020
Fair Value
Level 1
Level 2
Level 3
$
6,319 $
6,319 $
— $
99,054
99,054
4,564
1,002
7,949
4,564
—
—
—
—
1,002
—
$
118,888 $
109,937 $
1,002 $
—
—
—
—
7,949
7,949
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
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 and changes in unrealized gains (losses) are
disclosed in Note 6, 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 preferred stock investment in the variable interest entity (see Note 7) 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. Estimated fair value was $7.9 million and $7.6 million as of December 31, 2020 and December 31,
2019, respectively, recorded in other long-term assets on the Company's consolidated balance sheet. Unrealized gains of $0.3
million and $0.6 million were recorded in other comprehensive income in the year ended December 31, 2020, and 2019,
respectively.
Fair Value Disclosures
The Company's other long-term assets balance included notes receivable of $6.1 million as of December 31, 2020 and 2019,
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. There was no significant activity in Level 3
of the hierarchy during the year ended December 31, 2020.
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, 2020 and 2019.
73
9. Commitments and Contingencies
The following summarizes the Company's contractual commitments as of December 31, 2020 (in thousands):
Lease obligations
Outstanding purchase
commitments
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total
$
176 $
146 $
136 $
136 $
136 $
477 $
1,207
5,592
1,692
422
168
330
2,128
10,332
Total
$
5,768 $
1,838 $
558 $
304 $
466 $
2,605 $
11,539
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.
10. 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
Year Ended December 31,
2020
2019
2018
$
15,541 $
13,875 $
11,059
278,776
231,831
190,642
229
585
409
279,005
232,416
191,051
259,971
13,387
273,358
217,538
12,494
230,032
1,263
19,925 $
718
15,541 $
$
177,418
10,130
187,548
687
13,875
74
The Company's reserve for the subscription business segment increased $4.4 million from $15.5 million at December 31, 2019
to $19.9 million at December 31, 2020. This change was comprised of $279.0 million in expense recorded during the period
less $273.4 million in payments of veterinary invoices. This $279.0 million in veterinary invoice expense incurred included an
increase of $0.2 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 $0.6 million and $0.4 million as a result of
analysis of payment trends in the years ended December 31, 2019 and 2018, 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,
2020
2019
2018
$
5,653 $
2,187 $
1,697
72,286
38,881
(167)
(350)
72,119
38,531
63,359
5,409
68,768
—
33,254
1,811
35,065
—
$
9,004 $
5,653 $
23,784
(296)
23,488
21,615
1,383
22,998
—
2,187
The Company’s reserve for the other business segment increased $3.4 million from $5.7 million at December 31, 2019 to $9.0
million at December 31, 2020. This change was comprised of $72.1 million in expense recorded during the period less $68.8
million in payments of veterinary invoices. This $72.1 million in veterinary invoice expense incurred included a reduction of
$0.2 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 $0.4 million and $0.3 million as a result of analysis of payment
trends in each of the years ended December 31, 2019 and 2018, respectively.
Veterinary invoice expenses
In the following tables, the cumulative number of veterinary invoices represents the total number received as of December 31,
2020, 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 2017 through 2019 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, 2020.
75
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
2017
2018
2019
2020
Cumulative veterinary invoice expenses
Reserve
Cumulative
number of
veterinary
invoices
As of December 31,
As of December 31,
2017
2018
2019
2020
2020
2020
(unaudited)
(unaudited)
(unaudited)
$ 156,139 $ 156,414 $ 156,416 $ 156,172 $
—
730,136
$ 191,194 $ 191,679 $ 191,775 $
702
881,595
$ 233,609 $ 233,986 $
1,681
1,042,392
$ 281,248 $ 17,542
1,086,816
$ 863,181 $ 19,925
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
2017
2018
2019
2020
Cumulative veterinary invoice expenses
Reserve
Cumulative
number of
veterinary
invoices
As of December 31,
As of December 31,
2017
2018
2019
2020
2020
2020
(unaudited)
(unaudited)
(unaudited)
$ 14,740 $ 14,422 $ 14,473 $ 14,482 $
$ 23,786 $ 23,375 $ 23,469 $
$ 38,885 $ 38,610 $
—
45
32
106,124
174,778
281,215
$ 72,297 $
8,927
497,165
$ 148,858 $
9,004
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,
2020. Information for years 2017 through 2019 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
2017
2018
2019
2020
$
76
Year Ended December 31,
2017
2018
2019
2020
(unaudited)
(unaudited)
(unaudited)
145,793 $
$
155,412 $
178,554 $
$
155,951 $
190,311 $
219,993 $
$
$
Total amounts unpaid and recorded as a liability $
156,172
191,073
232,305
263,706
843,256
19,925
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
2017
2018
2019
2020
11. Debt
Year Ended December 31,
2017
2018
2019
2020
(unaudited)
(unaudited)
(unaudited)
$
13,054 $
14,410 $
14,468 $
$
21,617 $
23,355 $
$
33,258 $
$
$
14,482
23,424
38,578
63,370
139,854
Total amounts unpaid and recorded as a liability $
9,004
The Company had a revolving line of credit of up to $50.0 million with a maturity date in June 2022. The debt balance, net of
unamortized financing fees, was $26.1 million as of December 31, 2019. In December 2020, the Company elected to terminate
the line of credit and repaid all of the outstanding obligations.
12. 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, 2020, 2019 and 2018 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,
2020
2019
2018
$
1,118 $
697 $
468
758
3,795
2,773
8,912
235
353
364
3,312
2,120
6,846
204
$
9,147 $
7,050 $
571
356
209
2,304
1,335
4,775
175
4,950
As of December 31, 2020, the Company had 41,521 unvested stock options and 782,755 unvested restricted stock awards and
restricted stock units. Total stock-based compensation expense of $0.3 million related to unvested stock options and $24.5
million related to unvested restricted stock awards and restricted stock units is expected to be recognized over a weighted-
average period of approximately 0.4 years and 2.8 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, 2020, 2019, and 2018.
77
The following table presents information regarding stock options granted, exercised and forfeited for the periods presented:
Outstanding as of January 1, 2018
Granted
Exercised
Forfeited
Outstanding as of December 31, 2018
Granted
Exercised
Forfeited
Outstanding as of December 31, 2019
Granted
Exercised
Forfeited
Outstanding as of December 31, 2020
Number
of
Options
Weighted Average
Exercise
Price per Share
Aggregate
Intrinsic
Value
(in thousands)
4,006,399 $
7.16 $
88,578
—
(1,292,037)
(92,859)
2,621,503
—
(510,268)
(13,257)
2,097,978
—
(626,554)
(12,134)
1,459,290
—
2.82
15.36
9.01
—
5.28
18.23
9.86
—
9.54
17.41
9.93
—
36,625
—
43,136
—
13,151
—
57,907
—
35,696
—
160,200
Exercisable at December 31, 2020
1,417,769 $
9.69 $
155,984
As of December 31, 2020, stock options outstanding and stock options exercisable had a weighted average remaining
contractual life of 4.1 years and 4.0 years, respectively.
The fair value of options vested were as follows for the years ended December 31, 2020, 2019, and 2018. The Company didn't
grant any stock options in these three years.
Year:
2018
2019
2020
Weighted Average
Grant Date Fair
Value per Share
Fair Value of
Options Vested
(in thousands)
$
$
$
— $
— $
— $
2,665
1,591
1,105
78
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, 2020, 2019 and 2018:
Unvested shares as of January 1, 2018
Granted
Vested
Forfeited
Unvested shares as of December 31, 2018
Granted
Vested
Forfeited
Unvested shares as of December 31, 2019
Granted
Vested
Forfeited
Unvested shares as of December 31, 2020
13. Leases
Number of
Shares
Weighted Average
Grant Date
Fair Value per
Share
256,842 $
375,313
(149,213)
(31,782)
451,160
459,523
(276,184)
(52,556)
581,943
535,184
(266,640)
(67,732)
782,755 $
4.77
28.10
9.74
28.57
22.16
30.03
18.20
29.85
29.56
37.60
29.77
31.51
34.81
The Company leases certain office space and equipment from third parties and recognizes lease expense on a straight-line basis
over the lease term. For operating leases with an initial term of over 12 months, the Company recorded $0.9 million and $0.1
million right-of-use assets and lease liabilities on its consolidated balance sheets as of December 31, 2020 and 2019,
respectively. Leases with an initial term of 12 months or less are not recorded on its consolidated balance sheets. Rental
expense for operating leases was $0.2 million, $0.4 million and $1.4 million for the years ended December 31, 2020, 2019 and
2018, respectively.
The Company also leases a portion of its home office building to third parties and records related rental income within general
and administrative expense in the consolidated statements of operations. These leases have remaining lease terms of up to 6
years, some of which give tenants options to terminate the leases early, with termination fees required. The Company recorded
rental income of $1.9 million and $2.2 million for the years ended December 31, 2020 and December 31, 2019, respectively.
The following table summarizes the Company's future rental payments to be received from non-cancellable leases in place as of
December 31, 2020 (in thousands):
Year ending December 31:
2021
2022
2023
2024
2025
Thereafter
Total rental payments
$
$
1,303
1,345
882
384
319
100
4,333
79
14. Stockholders’ Equity
Common Stock and Preferred Stock
As of December 31, 2020, the Company had 100,000,000 shares of common stock authorized and 39,450,807 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,
2020, 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 any senior classes of stock outstanding at the time. The Company does not intend to declare or pay
any cash dividends in the foreseeable future.
Issuance of Common Stock in a Private Placement
The Company issued 3,636,364 shares of common stock through a private placement in the fourth quarter of 2020 for net
proceeds of $192.3 million. The newly issued shares are subject to a minimum holding period of three years.
Share Repurchase Program
In November 2019, the Company's board of directors approved a share repurchase program, pursuant to which the Company
may repurchase up to $15.0 million of its outstanding shares over the twelve-month period following the approval. The
Company repurchased 3,300 shares during year ended December 31, 2020. The share repurchase program expired in November
2020.
80
15. Segments
The Company has two reporting segments: subscription business and other business. The subscription business segment
currently includes revenue from subscription fees related to our “Trupanion” branded products, while the other business
segment is comprised of revenue from other product offerings that generally have a business-to-business relationship and
different margin profiles than our subscription segment, including revenue from writing policies on behalf of third parties and
revenue from other products and software solutions.
The chief operating decision maker reviews revenue 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, general and administrative expense, and
depreciation and amortization 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
Technology and development
General and administrative
Sales and marketing
Depreciation and amortization
Year Ended December 31,
2020
2019
2018
$
387,732 $
321,163 $
279,005
232,415
35,870
7,673
16,866
47,017
5,451
29,724
5,879
15,397
35,037
4,725
263,738
191,051
24,941
5,031
14,853
24,623
3,911
Subscription business operating income (loss)
(4,150)
(2,014)
(672)
Other business:
Revenue
Veterinary invoice expense
Other cost of revenue
Technology and development
General and administrative
Sales and marketing
Depreciation and amortization
Other business operating income (loss)
Gain (loss) from investment in joint venture
Total operating income (loss)
114,296
72,119
33,133
2,274
4,981
820
1,620
(651)
(126)
62,773
38,532
18,341
1,146
2,987
414
907
446
(352)
40,218
23,488
13,110
765
2,251
376
601
(373)
—
$
(4,927) $
(1,920) $
(1,045)
The following table presents the Company’s revenue by geographic region of the member (in thousands):
United States
Canada and Other
Total revenue
Year Ended December 31,
2020
2019
2018
$
$
419,162 $
316,138 $
246,280
82,866
67,798
57,676
502,028 $
383,936 $
303,956
Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2020 and 2019.
81
16. 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, 2020, the amount of dividends that may be paid by the Company’s insurance subsidiary in New York to the
Company without prior approval by regulatory authorities was $0.5 million. This insurance subsidiary did not pay dividends to
the Company during the years ended December 31, 2020, 2019, and 2018.
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 $4.7 million, $3.9 million, and $2.2 million during the years ended December 31,
2020, 2019 and 2018, respectfully.
The statutory net income for 2020, 2019 and 2018 and statutory capital and surplus at December 31, 2020, 2019 and 2018, 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,
2020
2019
2018
$
$
17,547 $
93,171 $
16,311 $
73,810 $
11,021
56,244
As of December 31, 2020, the Company’s insurance subsidiary in New York maintained $93.2 million of statutory capital and
surplus which was above the required amount of $79.1 million of statutory capital and surplus to avoid additional regulatory
oversight.
As of December 31, 2020, the Company had $6.7 million on deposit with various states in which it writes policies.
17. Income Taxes
Income (loss) before income taxes was as follows for the years ended December 31, 2020, 2019 and 2018 (in thousands):
United States
Foreign
Year Ended December 31,
2020
2019
2018
$
$
(5,408) $
(1,783) $
(1,054)
(319)
143
(5,727) $
(1,640) $
120
(934)
82
The components of income tax expense (benefit) were as follows (in thousands):
Current:
U.S. federal & state
Foreign
Deferred:
U.S. federal & state
Foreign
Year Ended December 31,
2020
2019
2018
$
198 $
12 $
45
243
(9)
(121)
(130)
52
64
116
(11)
105
Income tax expense (benefit)
$
113 $
169 $
(10)
37
27
(32)
(2)
(34)
(7)
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
Credits
Effective income tax rate
Year Ended December 31,
2020
2019
2018
21.0 %
(2.6)
122.3
(136.0)
(0.5)
(1.1)
(2.5)
(2.6)
21.0 %
(7.8)
177.2
(184.2)
(4.9)
(9.2)
(11.6)
9.2
21.0 %
4.6
828.5
(857.4)
(5.4)
(2.1)
(8.6)
20.2
(2.0) %
(10.3) %
0.8 %
The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
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
Less deferred tax asset valuation allowance
Net deferred tax liability
83
As of December 31,
2020
2019
$
3,921 $
1,822
37,070
27
1,776
697
706
2,219
885
30,569
240
2,102
547
243
46,019
36,805
(637)
(4,895)
(960)
(6,492)
39,527
(44,194)
(4,667) $
$
(398)
(1,117)
(775)
(2,290)
34,515
(35,609)
(1,094)
At December 31, 2020, the Company had U.S. federal and state net operating loss carryforwards of $37.0 million (tax-effected)
and U.S. federal income tax credits of $0.7 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, 2020, 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. Additionally, the Company has foreign net operating loss carryforwards of $0.1
million which may be carried forward indefinitely.
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, 2020 and 2019 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, 2020, the Company recognized a net increase of $8.6 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, 2017 through 2020.
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 subject to taxation in various states and foreign
jurisdictions, and may be subject to audit or examination by the relevant authorities in respect to those particular jurisdictions
primarily for 2016 and thereafter.
For the year ended December 31, 2020, the Company considers its foreign earnings to be indefinitely reinvested. These
earnings relate to ongoing operations and have been reinvested in active business operations. A deferred tax liability related to
taxes due upon repatriation to the U.S. has not been recorded.
The Company is booking Global Intangible Low-Taxed Income ("GILTI") on a current basis and is not booking deferred taxes
related to GILTI.
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
18. Employee Benefits
Year Ended December 31,
2020
2019
2018
113 $
89 $
15
5
19
5
133 $
113 $
327
(243)
5
89
$
$
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.
84
19. Related Parties
In August 2018, the Company invested $0.3 million in a limited liability entity in exchange for a 17.5% ownership interest. The
investee is considered to be a related party, as the Company has the ability to exercise significant influence over the investee. In
February 2020, the Company entered into a service agreement with the investee, under which the Company incurred $2.7
million of expenses for consulting services provided by the investee during the year ended December 31, 2020.
20. Quarterly Financial Information (Unaudited)
The following table contains quarterly financial data for the years ended December 31, 2020 and 2019 (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,
2020
Sept. 30,
2020
Jun. 30,
2020
Mar. 31,
2020
Dec. 31,
2019
Sept. 30,
2019
Jun. 30,
2019
Mar. 31,
2019
Three Months Ended
Total revenues
$ 142,687 $ 130,120 $ 117,920 $ 111,301 $ 105,483 $
99,276 $
92,199 $
86,978
Operating income (loss)
(3,169)
(2,257)
1,509
(1,010)
633
843
(2,113)
(1,283)
Net income (loss)
$
Net income (loss) per share:
Basic
Diluted
$
$
(3,502) $
(2,558) $
1,353 $
(1,133) $
636 $
782 $
(1,931) $
(1,296)
(0.09) $
(0.07) $
0.04 $
(0.03) $
0.02 $
0.02 $
(0.06) $
(0.09) $
(0.07) $
0.04 $
(0.03) $
0.02 $
0.02 $
(0.06) $
(0.04)
(0.04)
Weighted-average common shares outstanding:
Basic
Diluted
37,841,055
35,426,742
35,143,592
35,007,052
34,876,438
34,876,782
34,610,709
34,292,367
37,841,055
35,426,742
36,688,167
35,007,052
36,354,620
36,399,136
34,610,709
34,292,367
85
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, 2020 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, 2020, 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.
We completed the acquisition of Aquarium in October 2020. We have not yet fully incorporated the internal controls and
procedures at Aquarium into our internal control over financial reporting, and as such, management excluded Aquarium from
its assessment of the effectiveness of our internal control over financial reporting as of and for the year ended December 31,
2020. The acquired Aquarium business was immaterial to our consolidated financial statements, and constituted less than 10%
of our total assets as of December 31, 2020 and less than 1% of our total revenue for the year ended December 31, 2020.
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, 2020 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.
86
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, 2020, 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, 2020, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of Aquarium Software Limited (Aquarium) which is included in the 2020 consolidated financial statements of the
Company. Aquarium constituted less than 10% of the Company’s total assets as of December 31, 2020 and less than 1% of the
Company’s total revenues for the year then ended. Our audit of internal control over financial reporting of the Company also
did not include an evaluation of the internal control over financial reporting of Aquarium.
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, 2020 and 2019, 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, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a) and
our report dated February 11, 2021 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.
87
/s/ Ernst & Young LLP
Seattle, Washington
February 11, 2021
Item 9B. Other Information
None.
88
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 2021 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 2021 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 2021 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 2021 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 2021 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.
89
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
Number
3.1
3.2
3.3
4.1
4.2
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
Amended and Restated Bylaws of the
Registrant.
Description of Capital Stock
10-K
001-36537
3.1
3.1
4.1
4.1
10.1
10.2
8/28/2014
6/3/2016
2/14/2020
6/16/2014
6/16/2014
6/16/2014
X
S-1
S-1
S-1
333-196814
333-196814
333-196814
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†
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.
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.
S-1
333-196814
10.3
6/16/2014
S-1
S-1
333-196814
333-196814
10.4
10.8
6/16/2014
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
10.13
2/24/2015
10-K
001-36537
10.14
2/24/2015
10-K
001-36537
10.15
2/24/2015
90
10-K
001-36537
10.20
2/14/2018
10-K
001-36537
10.19
2/14/2019
10-K
001-36537
10.22
2/14/2020
10-K
001-36537
10.23
2/14/2020
10-K
001-36537
10.21
2/14/2019
8-K
001-36537
10.1
2/4/2021
8-K
001-36537
10.1
10/29/2020
8-K
001-36537
10.2
10/29/2020
8-K
001-36537
10.3
10/29/2020
10.12
10.13
10.14
10.15
10.16
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.
Quota Share Reinsurance Agreement between
Wyndham Insurance Company (SAC) Limited
and Omega General Insurance Company,
effective January 1, 2021.
10.17+
Compensation Program for Non-Employee
Directors of Trupanion, Inc, as amended on
January 29, 2021.
10.18+
Compensation Clawback Policy, effective
February 11, 2019.
10.19+
Trupanion, Inc. Employee Severance and
Change in Control Plan effective January 29,
2021.
10.20
10.21
10.22
21.1
23.1
24.1
31.1
31.2
32.1*
32.2*
Stock Purchase Agreement, dated as of
October 26, 2020 by and between Trupanion,
Inc. and Aflac Incorporated.
Strategic Alliance Agreement, dated as of
October 26, 2020 by and between Trupanion,
Inc. and Aflac Incorporated.
Shareholder Agreement, dated as of October
26, 2020 by and between Trupanion, Inc. and
Aflac Incorporated.
Subsidiaries of the Registrant.
Consent of independent registered public
accounting firm.
Power of Attorney (reference is made to the
signature page hereto).
Certification of Principal Executive Officer,
pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer,
pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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101.SCH
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101.CAL
Inline XBRL Taxonomy Extension Calculation
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101.DEF
Inline XBRL Taxonomy Extension Definition
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101.LAB
Inline XBRL Taxonomy Extension Labels
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Presentation Linkbase Document.
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Cover Page Interactive Data File (formatted in
Inline XBRL and contained in Exhibit 101)
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+ 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.
92
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 11th day of February, 2021.
SIGNATURES
TRUPANION, INC.
By:
/s/ Darryl Rawlings
Darryl Rawlings
Chief Executive Officer
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.
93
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
Date: February 11, 2020
/s/ Darryl Rawlings
Darryl Rawlings
Chief Executive Officer
(Principal Executive Officer)
/s/ Tricia Plouf
Tricia Plouf
President and 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/ Eric Johnson
Eric Johnson
Director
/s/ Dan Levitan
Dan Levitan
Director
/s/ H. Hays Lindsley
H. Hays Lindsley
Director
/s/ Howard Rubin
Howard Rubin
Director
94
Schedule I - Condensed Financial Information of Registrant
Trupanion, Inc.
Condensed Statements of Operations and Comprehensive Loss
(Parent Company Only, in thousands)
Year Ended December 31,
2020
2019
2018
Expenses:
Veterinary invoice expense
Other cost of revenue
Technology and development
General and administrative
Sales and marketing
Depreciation and amortization
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
$
1,118 $
697 $
468
1,087
7,055
2,799
328
353
904
5,944
2,137
211
12,855
10,246
(108)
(205)
(12,963)
(10,451)
1,361
(4,845)
(9,479)
8,460
(4,821)
1,327
(4,156)
(7,622)
5,423
390
Net loss
$
(5,840) $
(1,809) $
Other comprehensive income (loss), net of taxes:
Other comprehensive income (loss) of subsidiaries
Other comprehensive income (loss)
Comprehensive loss
571
357
208
4,738
1,355
445
7,674
—
(7,674)
1,184
(2,557)
(6,301)
4,042
1,332
(927)
(661)
(661)
2,821
2,821
1,003
1,003
$
(3,019) $
(806) $
(1,588)
95
Trupanion, Inc.
Condensed Balance Sheets
(Parent Company Only)
(In thousands, except share data)
December 31,
2020
2019
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:
$
101,131 $
3,983
463
105,577
6,319
680
5,478
14,378
209,031
$
341,463 $
Accounts payable, accrued liabilities, and other current liabilities
$
253 $
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,
2020 and December 31, 2019, 40,383,972 and 39,450,807 shares issued and outstanding at
December 31, 2020; 35,876,882 and 34,947,017 shares issued and outstanding at December 31,
2019
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31, 2020
and December 31, 2019, and 0 shares issued and outstanding at December 31, 2020 and December
31, 2019
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Treasury stock, at cost: 933,165 shares at December 31, 2020 and 929,865 shares at December 31,
2019
Total stockholders’ equity
Total liabilities and stockholders’ equity
253
—
1,109
162
1,524
—
—
439,007
3,071
(91,360)
(10,779)
339,939
$
341,463 $
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
96
Trupanion, Inc.
Condensed Statements of Cash Flows
(Parent Company Only, in thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
(Income) loss attributable to investments in subsidiaries
Depreciation and amortization
Stock-based compensation expense
Other, net
Changes in operating assets and liabilities
Net cash provided by (used in) operating activities
Investing activities
Cash paid in business acquisition, net of cash acquired
Purchases of property and equipment
Advances to and investments in subsidiaries
Other investments
Net cash used in investing activities
Financing activities
Issuance 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
Year Ended December 31,
2020
2019
2018
$
(5,840) $
(1,809) $
(927)
(390)
(1,332)
4,821
328
8,912
240
(1,142)
7,319
(48,133)
(341)
211
6,846
48
(601)
4,305
—
(728)
(24,885)
(11,931)
—
(7,019)
(73,359)
(19,678)
192,265
6,013
—
2,982
(1,115)
(1,667)
6,213
13,167
(32,450)
(78)
170,848
104,808
2,642
—
—
14,482
(891)
3,533
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
Cash, cash equivalents, and restricted cash at end of period
$
107,450 $
2,642 $
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 $4.7 million, $3.9 million and $2.2 million for the years ended December 31, 2020, 2019 and 2018,
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 5, 9, 11,
12, 14, and 17, respectively, to the Consolidated Financial Statements.
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