TRUPANION, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We provide medical insurance for cats and dogs throughout the United States, Canada and Puerto Rico. Our data-driven, vertically-integrated approach enables us to provide pet owners with what we believe is the highest value medical insurance for their pets, priced specifically for each pet’s unique characteristics. Our growing and loyal member base provides us with highly predictable and recurring revenue. We operate our business similar to other subscription-based businesses, with a focus on maximizing the estimated internal rate of return of an average pet. We operate in two business segments: subscription business and other business. We generate revenue in our subscription business segment primarily from subscription fees for our medical insurance, which we market to consumers. Fees are paid at the beginning of each subscription period, which automatically renews on a monthly basis. We generate revenue in our other business segment by writing policies on behalf of third parties. We do not undertake the marketing efforts for these policies and have a business-to-business relationship with these third parties. Our other business segment also includes revenue from companies or organizations that choose to offer medical insurance for cats and dogs as a benefit to their employees or members, and contracts include multiple pets. The products in our other business segment may be materially different from our subscription business. Our ultimate goal is to build the Trupanion brand by continuing to offer the highest value proposition in the industry and maintain strong alignment with the veterinary community. We believe our activities in our other business segment benefit the overall market for pet medical insurance by expanding upon product options and distribution models within other market niches. We generate leads for our subscription business through both third-party referrals and direct-to-consumer acquisition channels, which we then convert into members through our website and contact center. Veterinary hospitals represent our largest referral source. We engage our Territory Partners to have face-to-face visits with veterinarians and their staff. Territory Partners are dedicated to cultivating direct veterinary relationships and building awareness of the benefits of high quality medical insurance to veterinarians and their clients. Veterinarians then educate pet owners, who visit our website or call our contact center to learn more about, and potentially enroll in, Trupanion. We also receive a significant number of new leads from existing members adding pets and referring their friends and family members. Our direct-to-consumer acquisition channels serve as important resources for pet owner education and drive new member leads and conversion. We monitor average pet acquisition cost to evaluate the efficiency of our sales and marketing programs in acquiring new members and measure effectiveness based on our 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 COVID-19-related veterinary invoices other than a few for COVID-19 testing. • 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 1,600 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 tirelessly 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. 17 Key Operating Metrics The following tables set forth our key operating metrics for our subscription business, and total pets enrolled, for the six months ended June 30, 2020 and 2019, and for each of the last eight fiscal quarters. Six Months Ended June 30, 2020 2019 Total Business: Total pets enrolled (at period end) 744,727 577,686 Subscription Business: Total subscription pets enrolled (at period end) 529,400 461,314 Monthly average revenue per pet $ 59.19 $ 56.63 Lifetime value of a pet, including fixed expenses $ 597 $ 482 Average pet acquisition cost (PAC) $ 222 $ 209 Average monthly retention 98.66 % 98.57 % Three Months Ended Jun. 30, 2020 Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 Jun. 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 Total Business: Total pets enrolled (at period end) 744,727 687,435 646,728 613,694 577,686 548,002 521,326 497,942 Subscription Business: Total subscription pets enrolled (at period end) 529,400 508,480 494,026 479,427 461,314 445,148 430,770 416,527 Monthly average revenue per pet $ 59.40 $ 58.96 $ 58.58 $ 58.12 $ 57.11 $ 56.13 $ 55.15 $ 54.55 Lifetime value of a pet, including fixed expenses $ 597 $ 535 $ 523 $ 511 $ 482 $ 471 $ 449 $ 435 Average pet acquisition cost (PAC) $ 199 $ 247 $ 222 $ 208 $ 213 $ 205 $ 186 $ 155 Average monthly retention 98.66 % 98.59 % 98.58 % 98.59 % 98.57 % 98.58 % 98.60 % 98.61 % 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. 18 Lifetime value of a pet, including fixed expenses. Lifetime value of a pet, including fixed expenses, is calculated based on gross profit from our subscription business segment for the 12 months prior to the period end date excluding stock-based compensation expense related to cost of revenue from our subscription business segment, sign-up fee revenue and the change in deferred revenue between periods. This amount is also reduced by the fixed expenses related to our subscription business, which are the pro-rata portion of general and administrative and technology expenses, less stock-based compensation and depreciation, based on revenues. This amount, on a per pet basis, is multiplied by the implied average subscriber life in months. Implied average subscriber life in months is calculated as the quotient obtained by dividing one by one minus the average monthly retention rate. We monitor lifetime value of a pet, including fixed expenses, to estimate the value we might expect from new pets over their implied average subscriber life in months, if they behave like the average pet in that respective period. When evaluating the amount of sales and marketing expenses we may want to incur to attract new pet enrollments, we refer to the lifetime value of a pet, including fixed expenses, as well as our estimated internal rate of return calculation for an average pet, which also includes an estimated surplus capital charge, to inform the amount of acquisition spend in relation to the estimated payback period. Average pet acquisition cost. Average pet acquisition cost (PAC) is calculated as net acquisition cost divided by the total number of new subscription pets enrolled in that period. Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as sales and marketing expense, excluding stock-based compensation expense and other business segment sales and marketing expense, offset by sign-up fee revenue. We exclude stock-based compensation expense because the amount varies from period to period based on number of awards issued and market-based valuation inputs. We offset sign-up fee revenue because it is a one-time charge to new members collected at the time of enrollment used to partially offset initial setup costs, which are included in sales and marketing expenses. We exclude other business segment sales and marketing expense because that does not relate to subscription enrollments. We monitor average pet acquisition cost to evaluate the efficiency of our sales and marketing programs in acquiring new members and measure effectiveness based on our desired return on investment. Average monthly retention. Average monthly retention is measured as the monthly retention rate of enrolled subscription pets for each applicable period averaged over the 12 months prior to the period end date. As such, our average monthly retention rate as of June 30, 2020 is an average of each month’s retention from July 1, 2019 through June 30, 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 six months ended June 30, 2020 and 2019, and for each of the last eight fiscal quarters: Six Months Ended June 30, 2020 2019 Sales and marketing expense $ 19,684 $ 16,984 Net of sign-up fee revenue (1,546) (1,437) Excluding: Stock-based compensation expense (1,231) (996) Other business segment sales and marketing expense (354) (168) Net acquisition cost $ 16,553 $ 14,383 19 Three Months Ended Jun. 30, 2020 Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 Jun. 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sept. 30, 2018 Sales and marketing expense $ 9,242 $ 10,442 $ 9,212 $ 9,255 $ 8,757 $ 8,227 $ 6,994 $ 6,365 Net of sign-up fee revenue (781) (765) (730) (790) (734) (703) (655) (693) Excluding: Stock-based compensation expense (675) (556) (547) (577) (567) (429) (355) (358) Other business segment sales and marketing expense (191) (163) (152) (94) (38) (130) (102) (99) Net acquisition cost $ 7,595 $ 8,958 $ 7,783 $ 7,794 $ 7,418 $ 6,965 $ 5,882 $ 5,215 Components of Operating Results General We operate in two segments: subscription business and other business. Our subscription business segment includes revenue and expenses related to monthly subscriptions for our pet medical insurance, which we market directly to consumers. When we do not directly market to consumers, we classify the related revenue and expenses in our other business segment. Revenue We generate revenue in our subscription business segment primarily from subscription fees for our pet medical insurance. Fees are paid at the beginning of each subscription period, which automatically renews on a monthly basis. In most cases, our members authorize us to directly charge their credit card, debit card or bank account through automatic funds transfer. Subscription revenue is recognized on a pro rata basis over the monthly enrollment term. Membership may be canceled at any time without penalty, and we issue a refund for the unused portion of the canceled membership. We generate revenue in our other business segment primarily from writing policies on behalf of third parties where we do not undertake the direct consumer marketing. This segment includes the writing of policies that may be materially different from our subscription. Cost of Revenue Cost of revenue in each of our segments is comprised of the following: Veterinary invoice expense Veterinary invoice expense includes our costs to review veterinary invoices, administer the payments, and provide member services, and other operating expenses directly or indirectly related to this process. We also accrue for veterinary invoices that have been incurred but not yet received. This also includes amounts paid by unaffiliated general agents, and an estimate of amounts incurred and not yet paid for our other business segment. Other cost of revenue Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, Territory Partner renewal fees, credit card transaction fees and premium tax expenses. Other cost of revenue for the other business segment includes the commissions we pay to unaffiliated general agents, costs to administer the programs in the other business segment and premium taxes on the sales in this segment. Operating Expenses Our operating expenses are classified into three categories: technology and development, general and administrative, and sales and marketing. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses and stock-based compensation expense. Technology and Development Technology and development expenses primarily consist of personnel costs and related expenses for our technology staff, which includes information technology development and infrastructure support, third-party services, as well as depreciation of hardware and capitalized software. 20 General and Administrative General and administrative expenses consist primarily of personnel costs and related expenses for our finance, actuarial, human resources, regulatory, legal and general management functions, as well as facilities and professional services. Sales and Marketing Sales and marketing expenses primarily consist of the cost to educate veterinarians and consumers about the benefits of Trupanion, to generate leads and to convert leads into enrolled pets, as well as print, online and promotional advertising costs, and employee compensation and related costs. Sales and marketing expenses are driven primarily by investments to acquire new members. Gain (loss) from investment in joint venture Gain (loss) from investment in joint venture consists of the share of income and losses from our equity method investment in a joint venture, as well as income and expenses associated with administrative services provided to the joint venture. 21 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 return on PAC spend both on a detailed level by acquisition channel and in the aggregate. Timing of initiatives. Over time we plan to implement new initiatives to improve our member experience, make modifications to our subscription plan and find other ways to maintain a strong value proposition for our members. These initiatives will sometimes be accompanied by price adjustments, in order to compensate for an increase in benefits received by our members. The implementation of such initiatives may not always coincide with the timing of price adjustments, resulting in fluctuations in revenue and gross profit in our subscription business segment. Geographic mix of sales. The relative mix of our business between the United States and Canada impacts the monthly average revenue per pet we receive. Prices for our plan in Canada are generally higher than in the United States (in local currencies), which is consistent with the relative cost of veterinary care in each country. As our mix of business between the United States and Canada changes, our metrics, such as our monthly average revenue per pet, and our exposure to foreign exchange fluctuations will be impacted. Any expansion into other international markets could have similar effects. Other business segment. Our other business segment primarily includes revenue and expenses related to policies written on behalf of third parties. This segment includes the products that have been in the past, and may be in the future, materially different from our subscription. Our relationships in our other business segment are generally subject to termination provisions and are non-exclusive. Accordingly, we cannot control the volume of business, even if a contract is not terminated. Loss of an entire program via contract termination could result in the associated policies and revenues being lost over a period of 12 to 18 months, which could have a material impact on our results of operations. We may enter into additional relationships in the future to the extent we believe they will be profitable to us, which could also impact our operating results. 22 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. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Revenue: Subscription business $ 92,453 $ 77,736 $ 181,937 $ 151,958 Other business 25,467 14,463 47,284 27,219 Total revenue 117,920 92,199 229,221 179,177 Cost of revenue: Subscription business (1) 74,594 64,264 148,016 124,651 Other business 23,459 13,222 43,486 24,781 Total cost of revenue 98,053 77,486 191,502 149,432 Gross profit: Subscription business 17,859 13,472 33,921 27,307 Other business 2,008 1,241 3,798 2,438 Total gross profit 19,867 14,713 37,719 29,745 Operating expenses: Technology and development (1) 2,989 2,578 5,834 5,247 General and administrative (1) 6,100 5,219 11,616 10,638 Sales and marketing (1) 9,242 8,757 19,684 16,984 Total operating expenses 18,331 16,554 37,134 32,869 Gain (loss) from investment in joint venture (27) (272) (86) (272) Operating income (loss) 1,509 (2,113) 499 (3,396) Interest expense 341 317 720 634 Other income, net (202) (453) (484) (797) Income (loss) before income taxes 1,370 (1,977) 263 (3,233) Income tax expense (benefit) 17 (46) 43 (6) Net income (loss) $ 1,353 $ (1,931) $ 220 $ (3,227) (1) Includes stock-based compensation expense as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Cost of revenue $ 344 $ 278 $ 612 $ 525 Technology and development 133 110 233 173 General and administrative 1,075 918 1,804 1,536 Sales and marketing 675 567 1,231 996 Total stock-based compensation expense $ 2,227 $ 1,873 $ 3,880 $ 3,230 23 Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (as a percentage of revenue) Revenue 100 % 100 % 100 % 100 % Cost of revenue 83 84 84 83 Gross profit 17 16 16 17 Operating expenses: Technology and development 3 3 3 3 General and administrative 5 6 5 6 Sales and marketing 8 9 9 9 Total operating expenses 16 18 16 18 Gain (loss) from investment in joint venture — — — — Operating loss 1 (2) — (2) Interest expense — — — — Other income, net — — — — Loss before income taxes 1 (2) — (2) Income tax expense — — — — Net loss 1 % (2) % — % (2) % Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (as a percentage of subscription revenue) Subscription business revenue 100 % 100 % 100 % 100 % Subscription business cost of revenue 81 83 81 82 Subscription business gross profit 19 % 17 % 19 % 18 % 24 Comparison of the Three and Six Months Ended June 30, 2020 and 2019 Revenue Three Months Ended June 30, % Change Six Months Ended June 30, % Change 2020 2019 2020 2019 (in thousands, except percentages, pet and per pet data) Revenue: Subscription business $ 92,453 $ 77,736 19 % $ 181,937 $ 151,958 20 % Other business 25,467 14,463 76 47,284 27,219 74 Total revenue $ 117,920 $ 92,199 28 $ 229,221 $ 179,177 28 Percentage of Revenue by Segment: Subscription business 78 % 84 % 79 % 85 % Other business 22 16 21 15 Total revenue 100 % 100 % 100 % 100 % Total pets enrolled (at period end) 744,727 577,686 29 744,727 577,686 29 Total subscription pets enrolled (at period end) 529,400 461,314 15 529,400 461,314 15 Monthly average revenue per pet $ 59.40 $ 57.11 4 $ 59.19 $ 56.63 5 Average monthly retention 98.66 % 98.57 % 98.66 % 98.57 % Three months ended June 30, 2020 compared to three months ended June 30, 2019. Total revenue increased by $25.7 million, or 28%, to $117.9 million for the three months ended June 30, 2020. Revenue from our subscription business segment increased by $14.7 million, or 19%, to $92.5 million for the three months ended June 30, 2020. This increase in subscription business revenue was primarily due to a 15% increase in total subscription pets enrolled as of June 30, 2020 compared to June 30, 2019, and an increase in average revenue per pet of 4% for the same period. Increases in pricing were primarily due to the increased cost and utilization of veterinary care. Revenue from our other business segment increased by $11.0 million, or 76%, to $25.5 million for the three months ended June 30, 2020, primarily due to an increase in enrolled pets in this segment. Six months ended June 30, 2020 compared to six months ended June 30, 2019. Total revenue increased by $50.0 million, or 28%, to $229.2 million for the six months ended June 30, 2020. Revenue from our subscription business segment increased by $30.0 million, or 20%, to $181.9 million for the six months ended June 30, 2020. This increase in subscription business revenue was primarily due to a 15% increase in total subscription pets enrolled as of June 30, 2020 compared to June 30, 2019, and an increase in average revenue per pet of 5% for the same period. Increases in pricing were primarily due to the increased cost and utilization of veterinary care. Revenue from our other business segment increased by $20.1 million, or 74%, to $47.3 million for the six months ended June 30, 2020, primarily due to an increase in enrolled pets in this segment. 25 Cost of Revenue Three Months Ended June 30, % Change Six Months Ended June 30, % Change 2020 2019 2020 2019 (in thousands, except percentages, pet and per pet data) Cost of Revenue: Subscription business: Veterinary invoice expense $ 66,030 $ 57,161 16 % $ 131,218 $ 110,799 18 % Other cost of revenue 8,564 7,103 21 16,798 13,852 21 Total cost of revenue 74,594 64,264 16 148,016 124,651 19 Gross profit 17,859 13,472 33 33,921 27,307 24 Other business: Veterinary invoice expense 16,019 8,772 83 30,471 16,416 86 Other cost of revenue 7,440 4,450 67 13,015 8,365 56 Total cost of revenue 23,459 13,222 77 43,486 24,781 75 Gross profit $ 2,008 $ 1,241 62 $ 3,798 $ 2,438 56 Percentage of Revenue by Segment: Subscription business: Veterinary invoice expense 71 % 74 % 72 % 73 % Other cost of revenue 9 9 9 9 Total cost of revenue 81 83 81 82 Gross profit 19 17 19 18 Other business: Veterinary invoice expense 63 61 64 60 Other cost of revenue 29 30 28 31 Total cost of revenue 92 91 92 91 Gross profit 8 9 8 9 Total pets enrolled (at period end) 744,727 577,686 29 744,727 577,686 29 Total subscription pets enrolled (at period end) 529,400 461,314 15 529,400 461,314 15 Monthly average revenue per pet $ 59.40 $ 57.11 4 $ 59.19 $ 56.63 5 Three months ended June 30, 2020 compared to three months ended June 30, 2019. Cost of revenue for our subscription business segment increased by $10.3 million, or 16%, to $74.6 million for the three months ended June 30, 2020. This increase in subscription cost of revenue was primarily the result of a 15% increase in subscription pets enrolled and a 1% increase in veterinary invoice expense per pet. Veterinary invoice per pet benefited from a temporary reduction in veterinary invoice during the quarter due to COVID-19, increasing our subscription gross margin by approximately 1% of revenue. Total cost of revenue for our other business segment increased by $10.2 million, or 77%, to $23.5 million for the three months ended June 30, 2020, primarily due to the increase in enrolled pets in this segment. Six months ended June 30, 2020 compared to six months ended June 30, 2019. Cost of revenue for our subscription business segment increased by $23.4 million, or 19%, to $148.0 million for the six months ended June 30, 2020. This increase in subscription cost of revenue was primarily the result of a 15% increase in subscription pets enrolled and an increase of 3% in veterinary invoice expense per pet due to increases in the cost and utilization of veterinary care. Total cost of revenue for our other business segment increased by $18.7 million, or 75%, to $43.5 million for the six months ended June 30, 2020, primarily due to the increase in enrolled pets in this segment. 26 Technology and Development Expenses Three Months Ended June 30, % Change Six Months Ended June 30, % Change 2020 2019 2020 2019 (in thousands, except percentages) Technology and development $ 2,989 $ 2,578 16 % $ 5,834 $ 5,247 11 % Percentage of total revenue 3 % 3 % 3 % 3 % Three months ended June 30, 2020 compared to three months ended June 30, 2019. Technology and development expenses increased by $0.4 million, or 16%, for the three months ended June 30, 2020. The change was primarily due to a $0.4 million increase in compensation expenses and a $0.2 million increase in software and IT system expenditures, partially offset by a $0.2 million decrease in depreciation and amortization expenses. Technology and development expenses remained consistent at 3% as a percentage of revenue year over year. Six months ended June 30, 2020 compared to six months ended June 30, 2019. Technology and development expenses increased by $0.6 million, or 11%, for the six months ended June 30, 2020. The change was primarily due to a $0.7 million increase in compensation and third party contractor expenses, net of capitalization, and a $0.3 million increase in other technology expenditures, partially offset by a $0.4 million decrease in depreciation and amortization expenses. Technology and development expenses remained consistent at 3% as a percentage of revenue year over year. General and Administrative Expenses Three Months Ended June 30, % Change Six Months Ended June 30, % Change 2020 2019 2020 2019 (in thousands, except percentages) General and administrative $ 6,100 $ 5,219 17 % $ 11,616 $ 10,638 9 % Percentage of total revenue 5 % 6 % 5 % 6 % Three months ended June 30, 2020 compared to three months ended June 30, 2019. General and administrative expenses increased by $0.9 million, or 17%, to $6.1 million for the three months ended June 30, 2020. The change was primarily due to a $0.7 million increase in compensation expenses and a $0.3 million increase in depreciation and amortization, partially offset by a decrease of $0.1 million in legal, regulatory, and professional services fees. General and administrative expenses decreased from 6% to 5% as a percentage of revenue for the three months ended June 30, 2020, as we experienced scale in our support functions. Six months ended June 30, 2020 compared to six months ended June 30, 2019. General and administrative expenses increased by $1.0 million, or 9%, to $11.6 million for the six months ended June 30, 2020. This increase was primarily due to a $1.3 million increase in compensation expenses and a $0.3 million increase in depreciation and amortization, partially offset by a decrease of $0.5 million in legal, regulatory, and professional services fees. General and administrative expenses decreased from 6% to 5% as a percentage of revenue for the six months ended June 30, 2020, as we experienced scale in our support functions. 27 Sales and Marketing Expenses Three Months Ended June 30, % Change Six Months Ended June 30, % Change 2020 2019 2020 2019 (in thousands, except percentages, pet and per pet data) Sales and marketing $ 9,242 $ 8,757 6 % $ 19,684 $ 16,984 16 % Percentage of total revenue 8 % 9 % 9 % 9 % Subscription Business: Total subscription pets enrolled (at period end) 529,400 461,314 15 529,400 461,314 15 Average pet acquisition cost (PAC) $ 199 $ 213 (7) $ 222 $ 209 6 Three months ended June 30, 2020 compared to three months ended June 30, 2019. Sales and marketing expenses increased by $0.5 million, or 6%, to $9.2 million for the three months ended June 30, 2020. The change was primarily due to a $0.9 million increase in compensation expenses and approximately $0.3 million increase in other sales and marketing initiatives, partially offset by a $0.7 million decrease in travel and conference expenses due to COVID-19. Overall, sales and marketing expenses as a percentage of revenue decreased by 1.7% compared to prior year. While we scaled back our pet acquisition expenditures in the current quarter due to COVID-19, our revenue growth remained strong, led by consistent pet enrollments and a higher retention in the current period. Six months ended June 30, 2020 compared to six months ended June 30, 2019. Sales and marketing expenses increased by $2.7 million, or 16%, to $19.7 million for the six months ended June 30, 2020. The change was primarily due to a $2.1 million increase in compensation expense and a $1.2 million increase in other sales and marketing initiatives primarily related to increased investment in lead generation and conversion activities, partially offset by a $0.6 million decrease in travel and conference expenses due to COVID-19. Sales and marketing expenses as a percentage of revenue decreased by 0.9% compared to prior year. Revenue growth outpaced the increase in pet acquisition expenses in the current period, primarily due to consistent pet enrollments and a higher retention. 28 Liquidity and Capital Resources The following table summarizes our cash flows for the periods indicated (in thousands): Six months ended June 30, 2020 2019 Net cash provided by operating activities $ 7,774 $ 6,881 Net cash used in investing activities (8,878) (13,581) Net cash provided by financing activities 2,383 7,131 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net (434) 396 Net change in cash, cash equivalents and restricted cash $ 845 $ 827 Our primary sources of liquidity are cash provided by operations and available borrowings on our line of credit. We currently have a revolving line of credit of up to $50.0 million. Our primary requirements for liquidity are paying veterinary invoices, funding operations and capital requirements, investing in new member acquisition, investing in enhancements to our member experience, and servicing debt. As of June 30, 2020, we had $105.2 million in cash, cash equivalents and short-term investments and $22.2 million available under our line of credit, which excluded $0.3 million reserved for ancillary services. Most of the assets in our insurance subsidiary, American Pet Insurance Company (APIC), and our segregated cell business, Wyndham Insurance Company (SAC) Limited (WICL) Segregated Account AX, are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate. As of June 30, 2020, total assets and liabilities held outside of our insurance entities were $94.4 million and $44.1 million, respectively, including $5.5 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". We believe our cash and cash equivalents, short-term investments and line of credit are sufficient to fund our operations and capital requirements for the next 12 months. As we continue to grow, however, we may explore additional financing to fund our operations or to meet capital requirements. Financing could include equity, equity-linked, or debt financing. Additional financing may not be available to us on acceptable terms, or at all. In November 2019, our board of directors approved a share repurchase program, pursuant to which we may repurchase up to $15.0 million of our outstanding shares over the 12 months following the approval. Each quarter throughout this period, we intend to establish repurchase parameters reflecting our business’s capital allocation priorities, our stock price relative to our estimated intrinsic value, and general market conditions. We cannot predict the timing or extent of any repurchases of shares of common stock, as such repurchases will depend on a number of factors, some of which are beyond our control. We did not repurchase any shares under this program during the quarter ended June 30, 2020. Operating Cash Flows We derive operating cash flows from the sale of our subscription plans, which is used to pay veterinary invoices and other cost of revenue. Additionally, cash is used to support the growth of our business by reinvesting to acquire new pet enrollments and to fund projects that improve our members' experience. Cash provided by operating activities was $7.8 million for the six months ended June 30, 2020 compared to $6.9 million for the six months ended June 30, 2019. The change was primarily driven by increased pet count and scale in our operating departments, as well as the timing differences between collections from members and payments of veterinary invoices and payments to vendors. Changes in accounts receivable were primarily related to annual policies with monthly payment terms within our other business segment. Investing Cash Flows Cash used in investing activities is primarily related to the net purchase of investments to increase our statutory capital. Net cash used in investing activities decreased by $4.4 million for the six months ended June 30, 2020 compared to the same period in prior year, primarily due to $4.6 million lower net purchase of investments. Financing Cash Flows Cash provided by financing activities was $2.4 million and $7.1 million for the six months ended June 30, 2020 and 2019, respectively. The decrease of $4.7 million was primarily due to less drawn from our line of credit as well as a $2.5 million repayment in the current period. 29 Long-Term Debt Pacific Western Bank Loan and Security Agreement We have a syndicated loan agreement with Pacific Western Bank (PWB) and Western Alliance Bank (WAB), providing us a revolving line of credit of up to $50.0 million, with a maturity date in June 2022. We refer to this line of credit as our PWB credit facility. The maximum amount available to us under the PWB credit facility, inclusive of any amounts outstanding under the revolving line of credit, is the lesser of $50.0 million or the total amount of cash and securities held by our insurance entities, less amounts outstanding relating to other ancillary services and letters of credit, totaling $0.3 million as of June 30, 2020. Interest on the PWB credit facility accrues at a variable annual rate equal to the greater of 4.5%, or 0.75% plus the prime rate (4.50% at June 30, 2020). The PWB credit facility requires us to maintain certain financial and non-financial covenants, including maintaining a minimum cash balance of $1.4 million in our account at WAB and/or WAB affiliates and other cash or investments of $2.1 million in our accounts at PWB. As of June 30, 2020, we were in compliance with each of the financial and non-financial covenants. Our obligations under the PWB credit facility are secured by substantially all of our assets and a pledge of certain of our subsidiaries’ stock. As of June 30, 2020, we had $27.5 million in aggregate borrowings outstanding under the PWB credit facility. Regulation As of June 30, 2020, our insurance entities, APIC and WICL Segregated Account AX, held $75.1 million in short-term investments and $99.1 million in other current assets, including $18.2 million held in cash and cash equivalents to be used for operating expenses of our insurance subsidiaries. Most of the assets in APIC and WICL Segregated Account AX are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate. APIC The majority of our investments are held by our insurance entities to satisfy risk-based capital requirements of the National Association of Insurance Commissioners (NAIC). The NAIC requirements provide a method for analyzing the minimum amount of risk-based capital (statutory capital and surplus plus other adjustments) appropriate for an insurance company to support its overall business operations, taking into account the risk characteristics of the company’s assets, liabilities and certain other items . An insurance company found to have insufficient statutory capital based on its risk-based capital ratio may be subject to varying levels of additional regulatory oversight depending on the level of capital inadequacy. APIC must hold certain capital amounts in order to comply with the statutory regulations and, therefore, we cannot use these amounts for general operating purposes without regulatory approval. As our business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly. As of December 31, 2019, APIC was required to maintain at least $55.3 million of risk-based capital to avoid this additional regulatory oversight. As of that date, APIC maintained $73.8 million of risk-based capital. WICL Segregated Account AX WICL Segregated Account AX was established by WICL, with Trupanion, Inc. as the shareholder, to enter into a reinsurance agreement with Omega General Insurance Company. All of the assets and liabilities of WICL Segregated Account AX are legally segregated from other assets and liabilities within WICL, and all shares of the segregated account are owned by Trupanion, Inc. During February 2020, our parent entity received a dividend of $4.7 million from WICL Segregated Account AX as allowed under our agreements with WICL. As required by the Office of the Superintendent of Financial Institutions regulations related to our reinsurance agreement with Omega General Insurance Company, we are required to maintain a Canadian Trust account with the greater of CAD $2.0 million or 115% of unearned Canadian premium plus 15% of outstanding Canadian claims, including all incurred but not reported claims. As of December 31, 2019, the account held CAD $4.3 million. Though we are not directly regulated by the Bermuda Monetary Authority (BMA), WICL's regulation and compliance impacts us as it could have an adverse impact on the ability of WICL Segregated Account AX to pay dividends. WICL is regulated by the BMA under the Insurance Act of 1978 (Insurance Act) and the Segregated Accounts Company Act of 2000. The Insurance Act imposes on Bermuda insurance companies, solvency and liquidity standards, certain restrictions on the declaration and payment of dividends and distributions, certain restrictions on the reduction of statutory capital, and auditing and reporting requirements, and grants the BMA powers to supervise and, in certain circumstances, to investigate and intervene in the affairs of insurance companies. Under the Insurance Act, WICL, as a class 3 insurer, is required to maintain available statutory capital and surplus at a level equal to or in excess of a prescribed minimum established by reference to net written premiums and loss reserves. 30 Under the Bermuda Companies Act 1981, as amended, a Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities. The Segregated Accounts Company Act of 2000 further requires that dividends out of a segregated account can only be paid to the extent that the cell remains solvent and the value of its assets remain greater than the aggregate of its liabilities and its issued share capital and share premium accounts. Contractual Obligations We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancellable vendor service agreements. Management believes there have been no material changes to our contractual obligation disclosure as of June 30, 2020, compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 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. There have been no material changes to our critical accounting policies and estimates as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 31 Item 3. Quantitative and Qualitative Disclosures About Market Risks Management believes there have been no material changes to our quantitative and qualitative disclosures about market risks during the six months ended June 30, 2020, compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.