Item 5. Market for Registrant’s Common Equity
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market for our Common Stock
Our common stock began trading on the New York Stock Exchange (NYSE) under the symbol “TRUP” on July 18, 2014. Prior to that time, there was no public market for our common stock. 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.”
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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.
12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Trupanion Inc. $ 100.00 $ 159.02 $ 299.90 $ 257.58 $ 376.64 $ 1,226.54
S&P Small Cap 600 Index $ 100.00 $ 124.74 $ 139.38 $ 125.78 $ 152.02 $ 166.57
NASDAQ-100 Technology Sector Index $ 100.00 $ 124.05 $ 169.56 $ 159.31 $ 235.32 $ 326.10
Russell 2000 Index $ 100.00 $ 119.48 $ 135.18 $ 117.79 $ 146.51 $ 173.86
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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.
Year Ended December 31,
2020 2019 2018 2017 2016
(in thousands)
Consolidated statements of operations data:
Revenue:
Subscription business $ 387,732 $ 321,163 $ 263,738 $ 218,354 $ 173,356
Other business 114,296 62,773 40,218 24,313 14,874
Total revenue 502,028 383,936 303,956 242,667 188,230
Cost of revenue:
Subscription business (1)
314,875 262,139 215,992 176,883 141,321
Other business 105,252 56,873 36,598 22,734 13,621
Total cost of revenue 420,127 319,012 252,590 199,617 154,942
Operating expenses:
Technology and development (1)
9,947 7,025 5,796 6,226 6,466
General and administrative (1)
21,847 18,384 17,104 16,130 14,427
Sales and marketing (1)
47,837 35,451 24,999 19,104 15,247
Depreciation and amortization 7,071 5,632 4,512 4,232 3,846
Total operating expenses 86,702 66,492 52,411 45,692 39,986
Gain (loss) from investment in joint venture (126) (352) — — —
Operating loss (4,927) (1,920) (1,045) (2,642) (6,698)
Interest expense 1,381 1,349 1,198 533 218
Other (income) expense, net (581) (1,629) (1,309) (1,244) (58)
Loss before income taxes (5,727) (1,640) (934) (1,931) (6,858)
Income tax expense (benefit) 113 169 (7) (428) 38
Net loss $ (5,840) $ (1,809) $ (927) $ (1,503) $ (6,896)
(1) Includes stock-based compensation expense as follows:
Year Ended December 31,
2020 2019 2018 2017 2016
(in thousands)
Cost of revenue $ 1,586 $ 1,050 $ 927 $ 594 $ 275
Technology and development 758 364 209 216 246
General and administrative 3,795 3,312 2,304 1,887 1,893
Sales and marketing 2,773 2,120 1,335 722 532
Total stock-based compensation expense $ 8,912 $ 6,846 $ 4,775 $ 3,419 $ 2,946
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December 31,
2020 2019 2018 2017 2016
(in thousands)
Consolidated balance sheet data:
Cash and cash equivalents $ 139,878 $ 29,168 $ 26,552 $ 25,706 $ 23,637
Short-term investments 89,862 69,732 54,559 37,590 29,570
Working capital 186,628 67,196 54,773 40,692 34,729
Total assets 498,250 257,200 207,510 105,859 82,345
Current and long-term debt — 26,086 12,862 9,324 4,767
Total liabilities 158,311 120,440 78,337 57,425 37,630
Common stock and additional paid-in capital 439,007 232,731 219,838 134,511 129,574
Accumulated deficit (91,360) (85,520) (83,711) (82,784) (81,281)
Total stockholders' equity 339,939 136,760 129,173 48,434 44,715
Year Ended December 31,
2020 2019 2018 2017 2016
Other operational data (1) :
Total Business:
Total pets enrolled (at period end) 862,928 646,728 521,326 423,194 343,649
Subscription Business:
Total subscription pets enrolled 577,957 494,026 430,770 371,683 323,233
Monthly average revenue per pet $ 60.37 $ 57.52 $ 54.34 $ 52.07 $ 47.82
Lifetime value of a pet, including fixed expenses $ 653 $ 523 $ 449 $ 409 $ 290
Average pet acquisition cost (PAC) (2)
$ 247 $ 212 $ 164 $ 152 $ 123
Average monthly retention 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.”
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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.
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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.
Year Ended December 31,
2020 2019 2018
Total Business:
Total pets enrolled (at period end) 862,928 646,728 521,326
Subscription Business:
Total subscription pets enrolled (at period end) 577,957 494,026 430,770
Monthly average revenue per pet $ 60.37 $ 57.52 $ 54.34
Lifetime value of a pet, including fixed expenses $ 653 $ 523 $ 449
Average pet acquisition cost (PAC) $ 247 $ 212 $ 164
Average monthly retention 98.71 % 98.58 % 98.60 %
Period 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
Total Business:
Total pets enrolled (at period end) 862,928 804,251 744,727 687,435 646,728 613,694 577,686 548,002
Subscription Business:
Total subscription pets enrolled (at period end) 577,957 552,909 529,400 508,480 494,026 479,427 461,314 445,148
Monthly average revenue per pet $ 62.03 $ 60.87 $ 59.40 $ 58.96 $ 58.58 $ 58.12 $ 57.11 $ 56.13
Lifetime value of a pet, including fixed expenses $ 653 $ 615 $ 597 $ 535 $ 523 $ 511 $ 482 $ 471
Average pet acquisition cost (PAC) $ 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 %
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.
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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:
Year Ended December 31,
2020 2019 2018
Sales and marketing expense $ 47,837 $ 35,451 $ 24,999
Net of sign-up fee revenue (3,292) (2,957) (2,587)
Excluding:
Stock-based compensation expense (2,773) (2,120) (1,335)
Other business segment sales and marketing expense (820) (414) (377)
Net acquisition cost $ 40,952 $ 29,960 $ 20,700
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Period 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
Sales and marketing expense $ 14,809 $ 13,344 $ 9,242 $ 10,442 $ 9,212 $ 9,255 $ 8,757 $ 8,227
Net of sign-up fee revenue (919) (827) (781) (765) (730) (790) (734) (703)
Excluding:
Stock-based compensation expense (801) (741) (675) (556) (547) (577) (567) (429)
Other business segment sales and marketing expense (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.
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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.
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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.
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Results of Operations
The following tables set forth our results of operations for the periods presented both in absolute dollars and as a percentage of total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Year Ended December 31,
2020 2019 2018
(in thousands)
Revenue:
Subscription business $ 387,732 $ 321,163 $ 263,738
Other business 114,296 62,773 40,218
Total revenue 502,028 383,936 303,956
Cost of revenue:
Subscription business (1)
314,875 262,139 215,992
Other business 105,252 56,873 36,598
Total cost of revenue 420,127 319,012 252,590
Operating expenses:
Technology and development (1)
9,947 7,025 5,796
General and administrative (1)
21,847 18,384 17,104
Sales and marketing (1)
47,837 35,451 24,999
Depreciation and amortization 7,071 5,632 4,512
Total operating expenses 86,702 66,492 52,411
Gain (loss) from investment in joint venture (126) (352) —
Operating loss (4,927) (1,920) (1,045)
Interest expense 1,381 1,349 1,198
Other income, net (581) (1,629) (1,309)
Loss before income taxes (5,727) (1,640) (934)
Income tax expense (benefit) 113 169 (7)
Net loss $ (5,840) $ (1,809) $ (927)
(1) Includes stock-based compensation expense as follows:
Year Ended December 31,
2020 2019 2018
(in thousands)
Cost of revenue $ 1,586 $ 1,050 $ 927
Technology and development 758 364 209
General and administrative 3,795 3,312 2,304
Sales and marketing 2,773 2,120 1,335
Total stock-based compensation expense $ 8,912 $ 6,846 $ 4,775
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Year Ended December 31,
2020 2019 2018
(as a percentage of revenue)
Revenue 100 % 100 % 100 %
Cost of revenue 84 83 83
Operating expenses:
Technology and development 2 2 2
General and administrative 4 5 6
Sales and marketing 10 9 8
Depreciation and amortization 1 1 1
Total operating expenses 17 17 17
Gain (loss) from investment in joint venture — — —
Operating loss (1) (1) —
Interest expense — — —
Other income, net — — —
Loss before income taxes (1) — —
Income tax expense (benefit) — — —
Net loss (1) % — % — %
Year Ended December 31,
2020 2019 2018
(as a percentage of subscription revenue)
Subscription business revenue 100 % 100 % 100 %
Subscription business cost of revenue 81 82 82
Comparison of the years ended December 31, 2020, 2019, and 2018
Revenue
Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(in thousands, except percentages, pet and per pet data)
Revenue:
Subscription business $ 387,732 $ 321,163 $ 263,738 21% 22%
Other business 114,296 62,773 40,218 82 56
Total revenue $ 502,028 $ 383,936 $ 303,956 31 26
Percentage of Revenue by Segment:
Subscription business 77 % 84 % 87 %
Other business 23 16 13
Total revenue 100 % 100 % 100 %
Total pets enrolled (at period end) 862,928 646,728 521,326 33 24
Total subscription pets enrolled (at period end) 577,957 494,026 430,770 17 15
Monthly average revenue per pet $ 60.37 $ 57.52 $ 54.34 5 6
Average monthly retention 98.71 % 98.58 % 98.60 %
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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
Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(in thousands, except percentages, pet and per pet data)
Cost of Revenue:
Subscription business:
Veterinary invoice expense $ 279,005 $ 232,415 $ 191,051 20% 22%
Other cost of revenue 35,870 29,724 24,941 21 19
Total cost of revenue 314,875 262,139 215,992 20 21
Other business:
Veterinary invoice expense 72,119 38,532 23,488 87 64
Other cost of revenue 33,133 18,341 13,110 81 40
Total cost of revenue 105,252 56,873 36,598 85 55
Percentage of Revenue by Segment:
Subscription business:
Veterinary invoice expense 72 % 72 % 72 %
Other cost of revenue 9 9 9
Total cost of revenue 81 82 82
Other business:
Veterinary invoice expense 63 61 58
Other cost of revenue 29 29 33
Total cost of revenue 92 91 91
Total pets enrolled (at period end) 862,928 646,728 521,326 33 24
Total subscription pets enrolled (at period end) 577,957 494,026 430,770 17 15
Monthly average revenue per pet $ 60.37 $ 57.52 $ 54.34 5 6
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.
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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 $ 21,847 $ 18,384 $ 17,104 19% 7%
Percentage of total revenue 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
Year Ended December 31, Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(in thousands, except pet and per pet data)
Sales and marketing $ 47,837 $ 35,451 $ 24,999 35% 42%
Percentage of total revenue 10 % 9 % 8 %
Subscription Business:
Total subscription pets enrolled (at period end) 577,957 494,026 430,770 17 15
Average pet acquisition cost (PAC) $ 247 $ 212 $ 164 17 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.
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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
Year Ended December 31,
2020 2019 2018
(in thousands)
Interest expense $ 1,381 $ 1,349 $ 1,198
Other income, net (581) (1,629) (1,309)
Total other (income) expense, net $ 800 $ (280) $ (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.
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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 16,663 14,463 12,756
Total revenue 142,687 130,120 117,920 111,301 105,483 99,276 92,199 86,978
Cost of revenue:
Subscription business (1)
85,761 81,098 74,594 73,422 70,718 66,770 64,264 60,387
Other business 33,333 28,433 23,459 20,027 17,031 15,061 13,222 11,559
Total cost of revenue 119,094 109,531 98,053 93,449 87,749 81,831 77,486 71,946
Operating expenses:
Technology and development (1)
3,108 2,426 2,293 2,120 1,928 1,705 1,663 1,729
General and administrative (1)
6,502 5,412 5,073 4,860 4,665 4,388 4,585 4,746
Sales and marketing (1)
14,809 13,344 9,242 10,442 9,212 9,255 8,757 8,227
Depreciation and amortization 2,301 1,666 1,723 1,381 1,275 1,195 1,549 1,613
Total operating expenses 26,720 22,848 18,331 18,803 17,080 16,543 16,554 16,315
Gain (loss) from investment in joint venture (42) 2 (27) (59) (21) (59) (272) —
Operating income (loss) (3,169) (2,257) 1,509 (1,010) 633 843 (2,113) (1,283)
Interest expense 337 324 341 379 375 340 317 317
Other income, net (48) (49) (202) (282) (535) (297) (453) (344)
Income (loss) before income taxes (3,458) (2,532) 1,370 (1,107) 793 800 (1,977) (1,256)
Income tax expense (benefit) 44 26 17 26 157 18 (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):
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)
Cost of revenue $ 526 $ 448 $ 344 $ 268 $ 267 $ 258 $ 278 $ 247
Technology and development 392 133 133 100 97 94 110 63
General and administrative 883 1,108 1,075 729 860 916 918 618
Sales and marketing 801 741 675 556 547 577 567 429
Total stock-based compensation expense $ 2,602 $ 2,430 $ 2,227 $ 1,653 $ 1,771 $ 1,845 $ 1,873 $ 1,357
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Period 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
Other Financial and Operational Data:
Total Business:
Total pets enrolled (at period end) 862,928 804,251 744,727 687,435 646,728 613,694 577,686 548,002
Subscription Business:
Total subscription pets enrolled (at period end) 577,957 552,909 529,400 508,480 494,026 479,427 461,314 445,148
Monthly average revenue per pet $ 62.03 $ 60.87 $ 59.40 $ 58.96 $ 58.58 $ 58.12 $ 57.11 $ 56.13
Lifetime value of a pet, including fixed expenses $ 653 $ 615 $ 597 $ 535 $ 523 $ 511 $ 482 $ 471
Average pet acquisition cost (PAC) $ 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)
Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenue 83 84 83 84 83 82 84 83
Operating expenses:
Technology and development 2 2 2 2 2 2 2 2
General and administrative 5 4 4 7 4 4 5 5
Sales and marketing 10 10 8 9 9 9 9 8
Depreciation and amortization 2 1 1 1 1 1 2 2
Total operating expenses 19 18 16 17 16 17 18 19
Gain (loss) from investment in joint venture — — — — — — — —
Operating income (loss) (2) (2) 1 (1) 1 1 (2) (3)
Interest expense — — — — — — — —
Other income, net — — — — (1) — — —
Income (loss) before income taxes (2) (2) 1 (1) 1 1 (2) (1)
Income tax expense (benefit) — — — — — — — —
Net income (loss) (2) % (2) % 1 % (1) % 1 % 1 % (2) % (1) %
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 subscription revenue)
Subscription business revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Subscription business cost of revenue 81 82 81 82 82 81 83 81
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Liquidity and Capital Resources
The following table summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2020 2019 2018
Net cash provided by operating activities $ 21,544 $ 16,157 $ 12,680
Net cash used in investing activities (76,747) (28,008) (81,451)
Net cash provided by financing activities 170,848 14,044 71,229
Effect of exchange rates on cash and cash equivalents (16) 423 (812)
Net change in cash, cash equivalents, and restricted cash $ 115,629 $ 2,616 $ 1,646
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.
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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.
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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.
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