Newswires
TRUPANION, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We provide medical insurance for cats and dogs throughoutthe United States ,Canada ,Puerto Rico , andAustralia . 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 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. 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 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. 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 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. OurSeattle 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." 16 -------------------------------------------------------------------------------- Key Operating Metrics The following tables set forth total pets enrolled and key operating metrics for our subscription business for the nine months endedSeptember 30, 2021 and 2020 and for each of the last eight fiscal quarters. Nine Months Ended September 30, 2021 2020 Total Business: Total pets enrolled (at period end) 1,104,376 804,251 Subscription Business: Total subscription pets enrolled (at period end) 676,463 552,909 Monthly average revenue per pet$ 63.43 $ 59.77 Lifetime value of a pet, including fixed expenses $ 697$ 615 Average pet acquisition cost (PAC) $ 281$ 237 Average monthly retention 98.72 % 98.69 % Three Months Ended Sept. 30, 2021 Jun. 30, 2021 Mar. 31, 2021 Dec. 31, 2020 Sept. 30, 2020 Jun. 30, 2020 Mar. 31, 2020 Dec. 31, 2019 Total Business: Total pets enrolled (at period end) 1,104,376 1,024,226 943,854 862,928 804,251 744,727 687,435 646,728 Subscription Business: Total subscription pets enrolled (at period end) 676,463 643,395 609,835 577,957 552,909 529,400 508,480 494,026 Monthly average revenue per pet$ 63.60 $ 63.69 $
62.97
$ 58.96 $ 58.58 Lifetime value of a pet, including fixed expenses $ 697$ 681 $ 684 $ 653 $ 615$ 597 $ 535 $ 523 Average pet acquisition cost (PAC) $ 280$ 284 $ 279 $ 272 $ 261$ 199 $ 247 $ 222 Average monthly retention 98.72 % 98.72 %
98.73 % 98.71 % 98.69 % 98.66 % 98.59 % 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 September 30, 2021 is an average of each month's retention
from October 1, 2020 through September 30, 2021 . 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.
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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 nine months ended September 30, 2021 and 2020 and
for each of the last eight fiscal quarters:
Nine Months Ended September 30,
2021 2020
Sales and marketing expense $ 58,802 $ 33,028
Net of sign-up fee revenue (3,792) (2,373)
Excluding:
Stock-based compensation expense (7,024) (1,972)
Other business segment sales and marketing expense (423) (619)
Net acquisition cost $ 47,563 $ 28,064
Three Months Ended
Sept. 30, Sept. 30, Jun. 30, Dec. 31,
2021 Jun. 30, 2021 Mar. 31, 2021 Dec. 31, 2020 2020 2020 Mar. 31, 2020 2019
Sales and marketing expense
19,704
$ 10,442 $ 9,212 Net of sign-up fee revenue (1,268) (1,260) (1,264) (919) (827) (781) (765) (730) Excluding: Stock-based compensation expense (2,112) (2,181) (2,731) (801) (741) (675) (556) (547) Other business segment sales and marketing expense (134) (118) (171) (201) (265) (191) (163) (152) Net acquisition cost$ 16,194 $ 15,831 $ 15,538 $ 12,888 $ 11,511 $ 7,595 $ 8,958 $ 7,783 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. 19 -------------------------------------------------------------------------------- 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. 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 ofTrupanion , 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 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, measured by the estimated increase in our intrinsic value. For example, when the company has delivered strong performance, stock-based compensation may increase as a result of incentive-based grants being awarded according to our equity incentive plan. 20 -------------------------------------------------------------------------------- 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, the effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our sales and marketing expenditures and the competitive environment. Our average pet acquisition cost has 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, introduce new coverage plans, pursue pet food or other adjacent opportunities, improve our technology, increase the 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. 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 betweenthe United States andCanada impacts the monthly average revenue per pet we receive. Prices for our plan inCanada are generally higher than inthe United States (in local currencies), which is consistent with the relative cost of veterinary care in each country. As our mix of business betweenthe United States andCanada 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. 21 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our results of operations for the periods
presented both in absolute dollars and as a percentage of total revenue for
those periods. The period-to-period comparison of financial results is not
necessarily indicative of future results.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Revenue:
Subscription business $ 127,077 $ 99,379 $ 360,742 $ 281,316
Other business 54,590 30,741 143,870 78,025
Total revenue 181,667 130,120 504,612 359,341
Cost of revenue:
Subscription business(1) 103,754 81,098 299,037 229,114
Other business 49,747 28,433 131,764 71,919
Total cost of revenue 153,501 109,531 430,801 301,033
Operating expenses:
Technology and development(1) 4,391 2,426 12,201 6,839
General and administrative(1) 8,246 5,412 22,897 15,345
Sales and marketing(1) 19,708 13,344 58,802 33,028
Depreciation and amortization 2,944 1,666 9,195 4,770
Total operating expenses 35,289 22,848 103,095 59,982
Gain (loss) from investment in joint venture (69) 2 (149) (84)
Operating loss (7,192) (2,257) (29,433) (1,758)
Interest expense - 324 1 1,044
Other income, net (61) (49) (222) (533)
Gain (loss) before income taxes (7,131) (2,532) (29,212) (2,269)
Income tax expense (benefit) (312) 26 (724) 69
Net loss $ (6,819) $ (2,558) $ (28,488) $ (2,338)
(1) Includes stock-based compensation expense as follows:
Three Months Ended September
30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 1,311 $ 448 $ 5,769 $ 1,060
Technology and development 749 133 2,213 366
General and administrative 2,271 1,108 6,412 2,912
Sales and marketing 2,112 741 7,024 1,972
Total stock-based compensation expense
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Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(as a percentage of revenue)
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 84 84 85 84
Operating expenses:
Technology and development 2 2 2 2
General and administrative 5 4 5 4
Sales and marketing 11 10 12 9
Depreciation and amortization 2 1 2 1
Total operating expenses 19 18 20 17
Gain (loss) from investment in joint venture - - - -
Operating loss (4) (2) (6) -
Interest expense - - - -
Other income, net - - - -
Gain (loss) before income taxes (4) (2) (6) (1)
Income tax expense (benefit) - - - -
Net loss (4) % (2) % (6) % (1) %
Stock-based compensation expense: Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(as a percentage of revenue)
Cost of revenue 1 % - % 1 % - %
Technology and development - - - -
General and administrative 1 1 1 1
Sales and marketing 1 1 1 1
Total stock-based compensation expense 4 % 2 % 4 % 2 %
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(as a percentage of
subscription revenue)
Subscription business revenue 100 % 100 % 100 % 100 %
Subscription business cost of revenue 82 82 83 81
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-------------------------------------------------------------------------------- Comparison of the Three and Nine Months EndedSeptember 30, 2021 and 2020 Revenue Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change (in thousands, except percentages, pet and per pet data) Revenue: Subscription business$ 127,077 $ 99,379 28 %$ 360,742 $ 281,316 28 % Other business 54,590 30,741 78 143,870 78,025 84 Total revenue$ 181,667 $ 130,120 40$ 504,612 $ 359,341 40 Percentage of Revenue by Segment: Subscription business 70 % 76 % 71 % 78 % Other business 30 24 29 22 Total revenue 100 % 100 % 100 % 100 % Total pets enrolled (at period end) 1,104,376 804,251 37 1,104,376 804,251
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Total subscription pets enrolled (at period end) 676,463 552,909 22 676,463 552,909
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Monthly average revenue per pet $ 63.60$ 60.87 4 $ 63.43$ 59.77 6 Average monthly retention 98.72 % 98.69 % 98.72 % 98.69 % Three months endedSeptember 30, 2021 compared to three months endedSeptember 30, 2020 . Total revenue increased by$51.5 million , or 40%, to$181.7 million for the three months endedSeptember 30, 2021 . Revenue from our subscription business segment increased by$27.7 million , or 28%, to$127.1 million for the three months endedSeptember 30, 2021 . This increase in subscription business revenue was primarily due to a 22% increase in total subscription pets enrolled as ofSeptember 30, 2021 compared to a year ago, and a 4% year over year increase in average revenue per pet. Increases in pricing were primarily due to the increased cost and utilization of veterinary care, as well as changes in the Canadian currency exchange rate. Revenue from our other business segment increased by$23.8 million , or 78%, to$54.6 million for the three months endedSeptember 30, 2021 , primarily due to a 70% increase in enrolled pets in this segment. Nine months endedSeptember 30, 2021 compared to nine months endedSeptember 30, 2020 . Total revenue increased by$145.3 million , or 40%, to$504.6 million for the nine months endedSeptember 30, 2021 . Revenue from our subscription business segment increased by$79.4 million , or 28%, to$360.7 million . This increase in subscription business revenue was primarily due to a 22% increase in total subscription pets enrolled as ofSeptember 30, 2021 compared to a year ago, and a 6% year over year increase in average revenue per pet (approximately 4% on a constant currency basis). Increases in pricing were primarily due to the increased cost and utilization of veterinary care, as well as changes in the Canadian currency exchange rate. Revenue from our other business segment increased by$65.8 million , or 84%, to$143.9 million for the nine months endedSeptember 30, 2021 , primarily due to a 70% increase in enrolled pets in this segment. 24 --------------------------------------------------------------------------------
Cost of Revenue
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands, except percentages, pet and per pet data)
Cost of Revenue:
Subscription business:
Veterinary invoice expense $ 90,626 $ 71,872 26 % $ 261,605 $ 203,090 29 %
Other cost of revenue 13,128 9,226 42 37,432 26,024 44
Total cost of revenue 103,754 81,098 28 299,037 229,114 31
Other business:
Veterinary invoice expense 34,432 19,394 78 91,605 49,865 84
Other cost of revenue 15,315 9,039 69 40,159 22,054 82
Total cost of revenue $ 49,747 $ 28,433 75 131,764 71,919 83
Percentage of Revenue by Segment:
Subscription business:
Veterinary invoice expense 71 % 72 % 73 % 72 %
Other cost of revenue 10 9 10 9
Total cost of revenue 82 82 83 81
Other business:
Veterinary invoice expense 63 63 64 64
Other cost of revenue 28 29 28 28
Total cost of revenue 91 % 92 % 92 92
Total pets enrolled (at period end) 1,104,376 804,251 37 1,104,376 804,251
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Total subscription pets enrolled (at period end) 676,463 552,909 22 676,463 552,909
22
Monthly average revenue per pet $ 63.60$ 60.87 4 $ 63.43$ 59.77 6 Three months endedSeptember 30, 2021 compared to three months endedSeptember 30, 2020 . Cost of revenue for our subscription business segment was$103.8 million for the three months endedSeptember 30, 2021 , compared to$81.1 million for the same period in the prior year. The increase of 28% in subscription cost of revenue was primarily the result of a 22% increase in subscription pets enrolled and 3% increase in veterinary invoice expense per pet, which was attributable to increased cost and utilization of veterinary care. Additionally, stock-based compensation expense increased$0.9 million during the period due to new performance grants in the first quarter of this year. Cost of revenue for our other business segment increased by$21.3 million , or 75%, to$49.7 million for the three months endedSeptember 30, 2021 , primarily due to the increase in enrolled pets in this segment. Nine months endedSeptember 30, 2021 compared to nine months endedSeptember 30, 2020 . Cost of revenue for our subscription business segment was$299.0 million for the nine months endedSeptember 30, 2021 , compared to$229.1 million for the same period in the prior year. The increase of 31% in subscription cost of revenue was primarily the result of a 22% increase in subscription pets enrolled and an increase of 6% in veterinary invoice expense per pet due to increases in the cost and utilization of veterinary care. Additionally, stock-based compensation expense increased$4.7 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 of$2.3 million in the first quarter of this year. Cost of revenue for our other business segment increased by$59.8 million , or 83%, to$131.8 million for the nine months endedSeptember 30, 2021 , primarily due to the increase in enrolled pets in this segment. 25 --------------------------------------------------------------------------------
Technology and Development Expenses
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 % Change 2021 2020 % Change
(in thousands, except percentages)
Technology and development $ 4,391 $ 2,426 81 % $ 12,201 $ 6,839 78 %
Percentage of total revenue 2 % 2 % 2 % 2 %
Three months ended September 30, 2021 compared to three months ended September
30, 2020 . Technology and development expenses increased by $2.0 million , or 81%,
to $4.4 million for the three months ended September 30, 2021 . The increase was
primarily driven by development expenses of $0.9 million related to new product
offerings, or 0.5% of total revenue, and $0.6 million of increased stock-based
compensation during the period due to new performance grants in the first
quarter of this year. Overall, technology and development expenses remained
consistent at approximately 2% of revenue year over year.
Nine months ended September 30, 2021 compared to nine months ended September 30,
2020 . Technology and development expenses increased by $5.4 million , or 78%, to
$12.2 million for the nine months ended September 30, 2021 . The increase was
primarily driven by development expenses of $2.9 million related to new product
offerings, or 0.6% of total revenue, and $1.8 million of increased stock-based
compensation during the period due to new performance grants in the first
quarter of this year. Overall, technology and development expenses remained
consistent at approximately 2% of revenue year over year.
General and Administrative Expenses
Three Months Ended September
30, Nine Months Ended September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands, except percentages)
General and administrative $ 8,246 $ 5,412 52 % $ 22,897 $ 15,345 49 %
Percentage of total revenue 5 % 4 % 5 % 4 %
Three months ended September 30, 2021 compared to three months ended September
30, 2020 . General and administrative expenses increased by $2.8 million , or 52%,
to $8.2 million for the three months ended September 30, 2021 . The increase in
expense was primarily due to a $1.2 million increase in stock-based
compensation, a $1.0 million increase in compensation expense related primarily
to increased headcount, a $0.3 million increase in facilities-related expenses,
and a $0.3 million increase in legal, tax and other professional service fees.
Nine months ended September 30, 2021 compared to nine months ended September 30,
2020 . General and administrative expenses increased by $7.6 million , or 49%, to
$22.9 million for the nine months ended September 30, 2021 . The increase in
expense was primarily due to a $3.5 million increase in stock-based
compensation, a $2.0 million increase in compensation expense related primarily
to increased headcount, a $1.0 million increase in facilities-related expenses,
and a $1.0 million increase in legal, tax and other professional service fees.
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Sales and Marketing Expenses
Three Months Ended September
30, Nine Months Ended September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands, except percentages, pet and per pet data)
Sales and marketing $ 19,708 $ 13,344 48 % $ 58,802 $ 33,028 78 %
Percentage of total revenue 11 % 10 % 12 % 9 %
Subscription Business:
Total subscription pets enrolled
(at period end) 676,463 552,909 22 676,463 552,909 22
Average pet acquisition cost (PAC) $ 280 $ 261 7 $ 281 $ 237 19
Three months ended September 30, 2021 compared to three months ended September
30, 2020 . Sales and marketing expenses increased by $6.4 million , or 48%, to
$19.7 million for the three months ended September 30, 2021 , driving new
subscription pet enrollments to increase 31% year over year. The $6.4 million
increase was primarily attributable to a $2.5 million increase in sales and
marketing expenses to generate leads and increase conversion rates and a $2.6
million increase in compensation expenses primarily related to headcount
increases. Additionally, stock-based compensation expense increased $1.4 million
during the period due to new performance grants in the first quarter of this
year.
Nine months ended September 30, 2021 compared to nine months ended September 30,
2020 . Sales and marketing expenses increased by $25.8 million , or 78%, to $58.8
million for the nine months ended September 30, 2021 , driving new subscription
pet enrollments to increase 43% year over year. The $25.8 million increase was
attributable to a $11.5 million increase in sales and marketing expenses to
generate leads and increase conversion rates and a $9.1 million increase in
compensation expenses primarily related to headcount increases. Additionally,
stock-based compensation expense increased $5.1 million during the period due to
new performance grants in the first quarter of this year.
Depreciation and Amortization
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 % Change 2021 2020 % Change
(in thousands, except percentages)
Depreciation and amortization $ 2,944 $ 1,666 77% $ 9,195 $ 4,770 93%
Percentage of total revenue 2 % 1 % 2 % 1 %
Depreciation and amortization expenses have been reclassified as a separate line
item in the consolidated statement of operations and prior period amounts have
been reclassified from their original presentation to conform to the current
period presentation. We elected to present depreciation and amortization
expenses as a separate line item to better align with management's view of our
operating results.
Three months ended September 30, 2021 compared to three months ended September
30, 2020 . Depreciation and amortization expense increased by $1.3 million , or
77%, to $2.9 million for the three months ended September 30, 2021 . The change
was primarily due to $1.0 million incremental amortization as a result of
acquired intangible assets in the fourth quarter of 2020.
Nine months ended September 30, 2021 compared to nine months ended September 30,
2020 . Depreciation and amortization expense increased by $4.4 million , or 93%,
to $9.2 million for the nine months ended September 30, 2021 . In addition to
increased depreciation that is in line with business growth, the change was
primarily due to $3.1 million incremental amortization as a result of acquired
intangible assets in the fourth quarter of 2020.
27
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Stock-based compensation
Three months ended September 30, 2021 compared to three months ended September
30, 2020 . 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 $6.4 million during the quarter, up from $2.4
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.
Nine months ended September 30, 2021 compared to nine months ended September 30,
2020 . 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 $21.4 million during the period, up from $6.3
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. Of the $21.4
million , $4.3 million was related to a one-time 2020 performance grant, shared
with the entire team and fully recognized in the first quarter of this year.
28
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Liquidity and Capital Resources
The following table summarizes our cash flows for the periods indicated (in
thousands):
Nine months ended September 30,
2021 2020
Net cash provided by operating activities $ 2,302 $ 17,580
Net cash used in investing activities (31,807) (18,579)
Net cash provided by (used in) financing activities (674) 7,275
Effect of foreign exchange rate changes on cash, cash
equivalents, and restricted cash, net
(53) (214)
Net change in cash, cash equivalents and restricted cash
As ofSeptember 30, 2021 , we had$221.5 million in cash, cash equivalents and short-term investments. 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 ofSeptember 30, 2021 , total assets and liabilities held outside of our insurance entities were$226.4 million and$30.5 million , respectively, including$7.1 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 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, and investing in enhancements to our member experience. InDecember 2020 , we elected to terminate our line of credit facility and repaid all then outstanding obligations. InApril 2021 , our Board approved a share repurchase program, pursuant to which the Company may, betweenMay 2021 andMay 2026 , repurchase outstanding shares of our common stock. While the Board 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 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$2.3 million for the nine months endedSeptember 30, 2021 , compared to$17.6 million net cash provided by operating activities for the nine months endedSeptember 30, 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 claim 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$31.8 million for the nine months endedSeptember 30, 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 used in financing activities was$0.7 million for the nine months endedSeptember 30, 2021 , compared to$7.3 million net cash provided by financing activities during the same period in the prior year, primarily due to a decrease in borrowings under the line of credit facility. InDecember 2020 , we elected to terminate the facility and repaid all then outstanding obligations. 29 --------------------------------------------------------------------------------
Regulation
As ofSeptember 30, 2021 , our insurance entities collectively held$111.8 million in short-term investments and$180.5 million in other current assets, including$21.9 million held in cash and cash equivalents to be used for operating expenses of our insurance subsidiaries. Most of the assets in our insurance entities are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate. We expect our required capital held within our insurance entities to grow as our business grows.American Pet Insurance Company (APIC) The majority of our investments are held by our insurance entities to satisfy risk-based capital requirements of theNational Association of Insurance Commissioners (NAIC). The NAIC requirements provide a method for analyzing the minimum amount of risk-based capital (statutory capital and surplus plus other adjustments) appropriate for an insurance company to support its overall business operations, taking into account the risk characteristics of the company's assets, liabilities and certain other items. An insurance company found to have insufficient statutory capital based on its risk-based capital ratio may be subject to varying levels of additional regulatory oversight depending on the level of capital inadequacy. APIC must hold certain capital amounts in order to comply with the statutory regulations and, therefore, we cannot use these amounts for general operating purposes without regulatory approval. As our business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly. As ofDecember 31, 2020 , APIC was required to maintain at least$79.1 million of risk-based capital to avoid this additional regulatory oversight. As of that date, APIC maintained$93.2 million of risk-based capital.ZPIC Insurance Company (ZPIC) We established a new wholly-owned insurance subsidiary, ZPIC, in the second quarter of 2021. ZPIC is domiciled in the state ofMissouri . As ofSeptember 30, 2021 , ZPIC has not started underwriting any insurance policies.Wyndham Insurance Company (SAC) Limited (WICL) Segregated Account AX WICL Segregated Account AX was established by WICL, withTrupanion, Inc. as the shareholder, to enter into a reinsurance agreement withOmega General Insurance Company . All of the assets and liabilities of WICL Segregated Account AX are legally segregated from other assets and liabilities within WICL, and all shares of the segregated account are owned byTrupanion, Inc. InApril 2021 , our parent entity received a dividend of$5.6 million from WICL Segregated Account AX as allowed under our agreements with WICL. As required by the Office of the Superintendentof Financial Institutions regulations related to our reinsurance agreement withOmega General Insurance Company , we are required to maintain aCanadian Trust account with the greater of CAD$2.0 million or 120% of unearned Canadian premium plus 20% of outstanding Canadian claims, including all incurred but not reported claims. As ofDecember 31, 2020 , the account held CAD$5.8 million . Though we are not directly regulated by theBermuda Monetary Authority (BMA), WICL's regulation and compliance impacts us as it could have an adverse impact on the ability of WICL Segregated Account AX to pay dividends. WICL is regulated by the BMA under the Insurance Act of 1978 (Insurance Act) and the Segregated Accounts Company Act of 2000. The Insurance Act imposes onBermuda insurance companies, solvency and liquidity standards, certain restrictions on the declaration and payment of dividends and distributions, certain restrictions on the reduction of statutory capital, and auditing and reporting requirements, and grants the BMA powers to supervise and, in certain circumstances, to investigate and intervene in the affairs of insurance companies. Under the Insurance Act, WICL, as a class 3 insurer, is required to maintain available statutory capital and surplus at a level equal to or in excess of a prescribed minimum established by reference to net written premiums and loss reserves. Under the Bermuda Companies Act 1981, as amended, aBermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company's assets would thereby be less than its liabilities. The Segregated Accounts Company Act of 2000 further requires that dividends out of a segregated account can only be paid to the extent that the cell remains solvent and the value of its assets remain greater than the aggregate of its liabilities and its issued share capital and share premium accounts. Contractual Obligations We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancellable vendor service agreements. Management believes there have been no material changes to our contractual obligation disclosure as ofSeptember 30, 2021 , compared to those discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 30 -------------------------------------------------------------------------------- Critical Accounting Policies and Significant Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Generally, we base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates as compared to those described in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 31
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