What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2022-02-17 compared with 2021-02-12 · 196 added, 111 removed, 521 unchanged (37% of the section changed)

47 unchanged sentences

31,893 21,847 18,384 17,104 16,130

Sales and marketing (1)

New pet acquisition expense (1)

78,647 47,837 35,451 24,999 19,104

1 unchanged sentence

Total operating expenses 139,371 86,702 66,492 52,411 45,692

Gain (loss) from investment in joint venture (126) (352) — — —

Loss from investment in joint venture (171) (126) (352) — —

Operating loss (35,196) (4,927) (1,920) (1,045) (2,642)

Interest expense 10 1,381 1,349 1,198 533

Other (income) expense, net (581) (1,629) (1,309) (1,244) (58)

Other expense (income), net 14 (581) (1,629) (1,309) (1,244)

Loss before income taxes (35,220) (5,727) (1,640) (934) (1,931)

8 unchanged sentences

General and administrative 8,862 2,773 3,312 2,304 1,887

Sales and marketing 2,773 2,120 1,335 722 532

New pet acquisition expense 9,160 758 2,120 1,335 722

Total stock-based compensation expense $ 28,226 $ 8,912 $ 6,846 $ 4,775 $ 3,419

25 unchanged sentences

(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.”

For more information about net acquisition cost and a reconciliation of new pet acquisition expense to net acquisition cost, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

8 unchanged sentences

subscription business and other business.

We currently generate revenue in our subscription business segment from subscription fees for our “Trupanion” branded products.

We generate revenue in our subscription business segment primarily by subscription fees from our “Trupanion” branded products.

Fees are paid at the beginning of each subscription period, which automatically renews on a monthly basis.

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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.

We generate leads for our subscription business segment from a diverse set of member acquisition channels, which we then convert into members through our contact center, website and other direct-to-consumer activities.

These channels include leads from third-parties such as veterinarians and referrals from existing members.

Veterinary hospitals represent our largest referral source.

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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.

We monitor average pet acquisition cost to evaluate the efficiency 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.

We have not experienced a material adverse impact on our business due to COVID-19, but we continue to monitor conditions closely and adapt our operations to meet federal, state and local guidance.

Our focus remains on promoting employee health and safety, serving our members and ensuring business continuity.

Our Seattle headquarters is now open for those who want to work in that office, in compliance with applicable regulations and guidance.

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.

For additional details, see the section titled "Risk Factors."

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.

The following tables set forth total pets enrolled and key operating metrics for our subscription business for the years ended December 31, 2021, 2020 and 2019, and for each of the last eight fiscal quarters.

Year Ended December 31,

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Average monthly retention 98.74 % 98.71 % 98.58 %

Three Months Ended

31, 2021 Sept.

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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.

When evaluating the amount of pet acquisition 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.

Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as new pet acquisition expense, excluding stock-based compensation expense and other business segment 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.

We exclude other business segment pet acquisition expense because that does not relate to subscription enrollments.

We monitor average pet acquisition cost to evaluate the efficiency in acquiring new members and measure effectiveness based on our targeted return on investment.

Average monthly retention.

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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:

In addition to our results determined in accordance with U.S.

GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance.

We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes.

We believe that these non-GAAP financial measures, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance.

However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for, the directly comparable financial measures prepared in accordance with GAAP.

We calculate these non-GAAP financial measures by excluding certain non-cash or non-recurring expenses.

We exclude business combination transaction cost as it is non-recurring and not indicative of our operating performance.

We exclude stock-based compensation as it is non-cash in nature.

Although stock-based compensation expenses are expected to remain recurring expenses for the foreseeable future, we believe excluding them allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies.

We define non-GAAP development expenses as operating expenses incurred to develop new products and offerings that are pre-revenue.

We define non-GAAP fixed expenses as the total of Technology and Development expense and General and Administrative expense, less stock-based compensation expense, business combination transaction cost, and non-GAAP development expenses.

The following tables present the reconciliation of our non-GAAP financial measures from corresponding GAAP measures for the periods presented:

Year Ended December 31,

2021 2020 2019

Sales and marketing expense $ 47,837 $ 35,451 $ 24,999

Veterinary invoice expense $ 486,062 $ 351,124 $ 270,947

Stock-based compensation expense (4,538) (1,118) (697)

Other business cost of paying veterinary invoices (129,614) (72,119) (38,532)

Subscription cost of paying veterinary invoices (non-GAAP) $ 351,910 $ 277,887 $ 231,718

% of subscription revenue 71.1 % 71.7 % 72.1 %

Other cost of revenue $ 108,583 $ 69,003 $ 48,065

Stock-based compensation expense (2,610) (468) (353)

Other business variable expenses (57,367) (33,133) (18,341)

Subscription variable expenses (non-GAAP) $ 48,606 $ 35,402 $ 29,371

% of subscription revenue 9.8 % 9.1 % 9.1 %

Technology and development expense $ 16,866 $ 9,947 $ 7,025

General and administrative expense 31,893 21,847 18,384

Stock-based compensation expense (11,918) (4,553) (3,676)

Business combination transaction costs (82) (522) —

Development expenses (non-GAAP) (3,719) (339) —

Fixed expenses (non-GAAP) $ 33,040 $ 26,380 $ 21,733

% of total revenue 4.7 % 5.3 % 5.7 %

New pet acquisition expense $ 78,647 $ 47,837 $ 35,451

Stock-based compensation expense (9,160) (2,773) (2,120)

Other business pet acquisition expense (499) (820) (414)

Subscription acquisition cost (non-GAAP) $ 68,988 $ 44,244 $ 32,917

% of subscription revenue 13.9 % 11.4 % 10.2 %

Technology and development expense $ 16,866 $ 9,947 $ 7,025

General and administrative expense 31,893 21,847 18,384

Stock-based compensation expense (11,918) (4,553) (3,676)

Business combination transaction costs (82) (522) —

Fixed expenses (non-GAAP) (33,040) (26,380) (21,733)

Development expenses (non-GAAP) $ 3,719 $ 339 $ —

% of total revenue 0.5 % 0.1 % — %

Three Months Ended

31, 2021 Sept.

30, 2021 Jun.

30, 2021 Mar.

31, 2021 Dec.

31, 2020 Sept.

30, 2020 Jun.

30, 2020 Mar.

Veterinary invoice expense $ 132,852 $ 125,058 $ 118,282 $ 109,870 $ 98,169 $ 91,266 $ 82,049 $79,640

Stock-based compensation expense (798) (769) (672) (2,299) (358) (337) (245) (178)

Other business cost of paying veterinary invoices (38,009) (34,432) (31,029) (26,144) (22,254) (19,394) (16,019) (14,452)

Subscription cost of paying veterinary invoices (non-GAAP) $ 94,045 $ 89,857 $ 86,581 $ 81,427 $ 75,557 $ 71,535 $ 65,785 $ 65,010

% of subscription revenue 70.1 % 70.7 % 71.9 % 71.9 % 71.0 % 72.0 % 71.2 % 72.6 %

Other cost of revenue $ 30,992 $ 28,443 $ 25,433 $ 23,715 $ 20,925 $ 18,265 $ 16,004 $ 13,809

Stock-based compensation expense (581) (542) (552) (935) (168) (111) (99) (90)

Other business variable expenses (17,208) (15,315) (12,940) (11,904) (11,079) (9,039) (7,440) (5,575)

Subscription variable expenses (non-GAAP) $ 13,203 $ 12,586 $ 11,941 $ 10,876 $ 9,678 $ 9,115 $ 8,465 $ 8,144

% of subscription revenue 9.8 % 9.9 % 9.9 % 9.6 % 9.1 % 9.2 % 9.2 % 9.1 %

Technology and development expense $ 4,665 $ 4,391 $ 4,079 $ 3,731 $ 3,108 $ 2,426 $ 2,293 $ 2,120

General and administrative expense 8,996 8,246 7,435 7,216 6,502 5,412 5,073 4,860

Stock-based compensation expense (3,293) (3,020) (3,122) (2,483) (1,275) (1,241) (1,208) (829)

Business combination transaction costs — — — (82) (522) — — —

Development expenses (non-GAAP) (858) (919) (1,121) (821) (339) — — —

Fixed expenses (non-GAAP) $ 9,510 $ 8,698 $ 7,271 $ 7,561 $ 7,474 $ 6,597 $ 6,158 $ 6,151

% of total revenue 4.9 % 4.8 % 4.3 % 4.9 % 5.2 % 5.1 % 5.2 % 5.5 %

New pet acquisition expense $ 19,845 $ 19,708 $ 19,390 $ 19,704 $ 14,809 $ 13,344 $ 9,242 $ 10,442

Stock-based compensation expense (2,136) (2,112) (2,181) (2,731) (801) (741) (675) (556)

Other business pet acquisition expense (76) (134) (118) (171) (201) (265) (191) (163)

Subscription acquisition cost (non-GAAP) $ 17,633 $ 17,462 $ 17,091 $ 16,802 $ 13,807 $ 12,338 $ 8,376 $ 9,723

% of subscription revenue 13.1 % 13.7 % 14.2 % 14.8 % 13.0 % 12.4 % 9.1 % 10.9 %

Technology and development expense $ 4,665 $ 4,391 $ 4,079 $ 3,731 $ 3,108 $ 2,426 $ 2,293 $ 2,120

General and administrative expense 8,996 8,246 7,435 7,216 6,502 5,412 5,073 4,860

Stock-based compensation expense (3,293) (3,020) (3,122) (2,483) (1,275) (1,241) (1,208) (829)

Business combination transaction costs — — — (82) (522) — — —

Fixed expenses (non-GAAP) (9,510) (8,698) (7,271) (7,561) (7,474) (6,597) (6,158) (6,151)

Development expenses (non-GAAP) $ 858 $ 919 $ 1,121 $ 821 $ 339 $ — $ — $ —

% of total revenue 0.4 % 0.5 % 0.7 % 0.5 % 0.2 % — % — % — %

When determining our PAC, we calculate net acquisition cost for a more comparable metric across periods.

Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as GAAP new pet acquisition expense, excluding stock-based compensation expense and other business segment expense, offset by sign-up fee revenue.

We exclude stock-based compensation expense because the amount varies from period to period based on the number of awards issued and market-based valuation inputs.

We exclude other business segment pet acquisition expense because it does not relate to subscription enrollments.

The following tables reconcile GAAP new pet acquisition expense to non-GAAP net acquisition cost (in thousands) for the years ended December 31, 2021, 2020, and 2019, and for each of the last eight fiscal quarters:

Year Ended December 31,

2021 2020 2019

New pet acquisition expense $ 78,647 $ 47,837 $ 35,451

Net of sign-up fee revenue (4,954) (3,292) (2,957)

Stock-based compensation expense (9,160) (2,773) (2,120)

Other business segment sales and marketing expense (820) (414) (377)

Other business segment pet acquisition expense (499) (820) (414)

Net acquisition cost $ 64,034 $ 40,952 $ 29,960

Three Months Ended

31, 2021 Sept.

5 unchanged sentences

30, 2020 Mar.

Sales and marketing expense $ 14,809 $ 13,344 $ 9,242 $ 10,442 $ 9,212 $ 9,255 $ 8,757 $ 8,227

New pet acquisition expense $ 19,845 $ 19,708 $ 19,390 $ 19,704 $ 14,809 $ 13,344 $ 9,242 $ 10,442

Net of sign-up fee revenue (1,162) (1,268) (1,260) (1,264) (919) (827) (781) (765)

Stock-based compensation expense (2,136) (2,112) (2,181) (2,731) (801) (741) (675) (556)

Other business segment sales and marketing expense (201) (265) (191) (163) (152) (94) (38) (130)

Other business segment pet acquisition expense (76) (134) (118) (171) (201) (265) (191) (163)

Net acquisition cost $ 16,471 $ 16,194 $ 15,831 $ 15,538 $ 12,888 $ 11,511 $ 7,595 $ 8,958

2 unchanged sentences

subscription business and other business.

We currently generate revenue in our subscription business segment from subscription fees related to our “Trupanion” branded products.

Our subscription business segment primarily relates to subscription fees from 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.

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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.

This segment also includes revenue from other products and software solutions that have a different margin profile from our subscription business.

Cost of Revenue

9 unchanged sentences

Our operating expenses are classified into four categories:

technology and development, general and administrative, sales and marketing, and depreciation and amortization.

technology and development, general and administrative, new pet acquisition expense, 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.

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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.

New pet acquisition expense

New pet acquisition expenses primarily consist of costs, including employee compensation, 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.

New pet acquisition expense was previously termed “sales and marketing” on the consolidated statement of operations.

This update represents a change in name only.

It does not denote a change in method of accounting.

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.

Depreciation and amortization expenses consist of depreciation of property, equipment, and software developed for internal use, 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.

Stock-based compensation

Stock-based compensation is included in the cost and expense line items above.

Stock-based compensation will vary depending on corporate performance pursuant to our pre-approved equity incentive plan.

For example, when we have delivered strong performance, stock-based compensation may increase as a result of incentive-based awards under our equity incentive plan.

Factors Affecting Our Performance

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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 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 pet acquisition 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, the effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our pet acquisition 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.

We continually assess our pet acquisition 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.

Over time we plan to implement new initiatives to improve our member experience, make modifications to our subscription plan, introduce new coverage plans, pursue pet food or other adjacent opportunities, improve our technology, increase the number of veterinary hospitals using our direct pay software, 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.

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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 other business segment primarily includes other product offerings that generally have a business-to-business relationship.

These products 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.

Loss of an entire program via contract termination could result in the associated policies and revenue 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.

18 unchanged sentences

31,893 21,847 18,384

Sales and marketing (1)

New pet acquisition expense (1)

78,647 47,837 35,451

1 unchanged sentence

Total operating expenses 139,371 86,702 66,492

Gain (loss) from investment in joint venture (126) (352) —

Loss from investment in joint venture (171) (126) (352)

Operating loss (35,196) (4,927) (1,920)

Interest expense 10 1,381 1,349

Other income, net (581) (1,629) (1,309)

Other expense (income), net 14 (581) (1,629)

Loss before income taxes (35,220) (5,727) (1,640)

Income tax expense (benefit) 113 169 (7)

Income tax expense 310 113 169

Net loss $ (35,530) $ (5,840) $ (1,809)

6 unchanged sentences

General and administrative 8,862 3,795 3,312

Sales and marketing 2,773 2,120 1,335

New pet acquisition expense 9,160 2,773 2,120

Total stock-based compensation expense $ 28,226 $ 8,912 $ 6,846

7 unchanged sentences

General and administrative 5 4 5

Sales and marketing 10 9 8

New pet acquisition expense 11 10 9

Depreciation and amortization 2 1 1

Total operating expenses 20 17 17

Gain (loss) from investment in joint venture — — —

Loss from investment in joint venture — — —

Operating loss (5) (1) (1)

Interest expense — — —

Other income, net — — —

Other expense (income), net — — —

Loss before income taxes (5) (1) —

Income tax expense (benefit) — — —

Income tax expense — — —

Net loss (5) % (1) % — %

Stock-based compensation expense:

Year Ended December 31,

2021 2020 2019

(as a percentage of revenue)

Cost of revenue 1 % — % — %

Technology and development 1 1 1

General and administrative — — —

New pet acquisition expense 1 1 1

Total stock-based compensation expense 4 % 2 % 2 %

Year Ended December 31,

2021 2020 2019

(as a percentage of subscription revenue)

22 unchanged sentences

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.

Revenue from our other business segment increased by $89.8 million to $204.1 million for the year ended December 31, 2021, or 79%, primarily due to a 66% increase in enrolled pets in this segment.

Cost of Revenue

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Cost of revenue for our subscription business segment was $407.7 million, or 82% of revenue, for the year ended December 31, 2021, compared to $314.9 million, or 81%, of revenue for the year ended December 31, 2020.

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.

This increase of 29% in subscription cost of revenue was primarily the result of a 22% increase in subscription pets enrolled and an increase of 5% in veterinary invoice expense per pet due to increases in the cost and utilization of veterinary care.

Additionally, stock-based compensation expense increased $5.6 million during the period due to new performance grants in the first quarter of this year, including the full impact of one-time team grants in the first quarter of $2.3 million.

Cost of revenue for our other business segment increased by $81.7 million, or 78%, to $187.0 million for the year ended December 31, 2021, primarily due to the increase in enrolled pets in this segment.

Technology and Development Expenses

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Technology and development expenses increased by $6.9 million, or 70%, to $16.9 million for the year ended December 31, 2021.

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.

Technology expense increased by $3.9 million year over year, primarily due to $2.3 million of increased stock-based compensation during the period due to new performance grants in the first quarter of this year, as well as $1.6 million increase in general technology expense to support the business growth.

Development expense associated with developing new products and offerings was $3.7 million, or 0.5% of our total revenue, for the twelve months ended December 31, 2021.

It increased by $3.0 million year over year, as a result of expenditures and investment in several pre-revenue initiatives.

Excluding stock-based compensation, technology and development expenses in total remained consistent at approximately 2% as a percentage of revenue year over year.

General and Administrative Expenses

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General and administrative expenses increased by $10.1 million, or 46%, to $31.9 million for the year ended December 31, 2021.

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

The increase in expense was primarily due to a $5.1 million increase in stock-based compensation, a $2.6 million increase in compensation expense related primarily to increased headcount, a $1.2 million increase in facilities-related expenses, and a $1.0 million increase in legal, tax and other professional service fees.

Excluding stock-based compensation, general and administrative expenses were 3.3% of revenue, compared to 3.6% of revenue in the prior year.

New Pet Acquisition Expense

Year Ended December 31, % Change

2 unchanged sentences

(in thousands, except pet and per pet data)

Sales and marketing $ 47,837 $ 35,451 $ 24,999 35% 42%

New pet acquisition expense $ 78,647 $ 47,837 $ 35,451 64% 35%

Percentage of total revenue 11 % 10 % 9 %

3 unchanged sentences

Year ended December 31, 2021 compared to year ended December 31, 2020.

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.

New pet acquisition expense increased by $30.8 million, or 64%, to $78.6 million, for the year ended December 31, 2021.

The increase was primarily attributable to a $13.7 million increase in expenses to generate leads and increase conversion rates and a $10.3 million increase in compensation expenses primarily related to headcount increases.

Additionally, stock-based compensation expense increased $6.4 million during the period due to new performance grants in the first quarter of this year.

Depreciation and Amortization

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Percentage of total revenue 2 % 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.

Depreciation and amortization expenses have been reclassified as a separate line item in the consolidated statement of operations since 2020 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, 2021 compared to year ended December 31, 2020.

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)

Depreciation and amortization expense increased by $4.9 million, or 69%, to $12.0 million for the year ended December 31, 2021.

The increase was primarily due to a $4.1 million incremental amortization in 2021 as a result of acquired intangible assets in the fourth quarter of 2020, as well as increased depreciation in line with business growth.

Stock-Based Compensation

Year ended December 31, 2021 compared to year ended December 31, 2020.

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.

Stock-based compensation is included in the cost and expense line items in the consolidated statements of operations, discussed above.

Stock-based compensation expense in total was $28.2 million for the year ended December 31, 2021, up from $8.9 million in the prior year period.

The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants, including grants in the first quarter of this year for the strong 2020 performance, calculated according to our equity incentive plan.

Quarterly Results of Operations

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8,996 8,246 7,435 7,216 6,502 5,412 5,073 4,860

Sales and marketing (1)

New pet acquisition expense (1)

19,845 19,708 19,390 19,704 14,809 13,344 9,242 10,442

4 unchanged sentences

Interest expense 9 — 3 (2) 337 324 341 379

Other income, net (48) (49) (202) (282) (535) (297) (453) (344)

Other expense (income), net 236 (61) (99) (62) (48) (49) (202) (282)

Income (loss) before income taxes (6,008) (7,131) (9,416) (12,665) (3,458) (2,532) 1,370 (1,107)

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General and administrative 2,450 2,271 2,322 1,819 883 1,108 1,075 729

Sales and marketing 801 741 675 556 547 577 567 429

New pet acquisition expense 2,136 2,112 2,181 2,731 801 741 675 556

Total stock-based compensation expense $ 6,808 $ 6,443 $ 6,527 $ 8,448 $ 2,602 $ 2,430 $ 2,227 $ 1,653

Three Months Ended

31, 2021 Sept.

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General and administrative 5 5 4 7 5 4 4 4

Sales and marketing 10 10 8 9 9 9 9 8

New pet acquisition expense 10 11 12 13 10 10 8 8

Depreciation and amortization 1 2 2 2 2 1 1 1

3 unchanged sentences

Interest expense — — — — — — — —

Other income, net — — — — (1) — — —

Other expense (income), net — — — — — — — —

Income (loss) before income taxes (3) (4) (6) (8) (2) (2) 1 (1)

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Net cash used in investing activities (51,913) (76,747) (28,008)

Net cash provided by financing activities 170,848 14,044 71,229

Net cash (used in) provided by financing activities (1,125) 170,848 14,044

Effect of exchange rates on cash and cash equivalents 252 (16) 423

1 unchanged sentence

As of December 31, 2021, we had $213.4 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.

Most of the assets in our insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate.

As of December 31, 2021, total assets and liabilities held outside of our insurance entities were $210.8 million and $31.6 million, respectively, including $8.0 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.

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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.

As we continue to grow and consider strategic opportunities, however, we may explore additional financing to fund our operations and growth 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.

Our primary requirements for liquidity are paying veterinary invoices, funding operations and capital requirements, investing in new member acquisition, and investing in enhancements to our member experience.

In December 2020, we elected to terminate our line of credit facility and repaid all then outstanding obligations.

We have certain contractual obligations in the normal course of business, including obligations and commitments relating to non-cancellable vendor purchase agreements, as well as future payments of veterinary invoice claims.

Refer to Note 10, Reserve for Veterinary Invoices, included in Item 8 of Part II of this 10-K, for further details on anticipated cash outflows.

In April 2021, our board of directors approved a share repurchase program, pursuant to which the Company may, between May 2021 and May 2026, repurchase outstanding shares of our common stock.

While our board of directors has approved the program, any repurchase will be subject to quarterly assessments based on parameters we set.

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.

These include uses of capital in a given quarter, available cash, our stock price relative to our estimated intrinsic value, and general market conditions.

We have not repurchased any shares under this program.

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.

We derive operating cash flows primarily 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.

Net cash provided by operating activities was $7.5 million for the year ended December 31, 2021, compared to $21.5 million net cash provided by operating activities for the year ended December 31, 2020.

The change was primarily driven by increased pet acquisition spend during the current period to drive new pet enrollments and future growth, faster payment of veterinary invoices as a result of increased utilization of claims automation, 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.

Net cash used in investing activities was $51.9 million for the year ended December 31, 2021, primarily related to net purchase of investments to increase our statutory capital, as well as purchases of property, equipment and intangible assets, primarily related to development of internal use software focused on new product initiatives and member experience improvements.

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.

Net cash used in financing activities was $1.1 million for the year ended December 31, 2021, compared to $170.8 million net cash provided by financing activities in the prior year.

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.

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.

The financing cash flow change year over year 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 in 2020.

Critical Accounting Policies and Significant Estimates

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Our reserve estimate for these expenses was $28.9 million as of December 31, 2020.

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.

As of December 31, 2021, we reevaluated the remaining reserve for those periods prior to December 31, 2020 and recorded an adjustment to our income statement to decrease it by $1.6 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.

As discussed in Item 8, Note 3—Business Combination, we acquired 100% of the equity of Aquarium Software Limited (Aquarium) for total consideration of approximately $48.3 million in net cash on October 30, 2020.

Accounting for this 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.

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity