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 ,Europe ,Puerto Rico , andAustralia . Through our data-driven, vertically-integrated approach, we develop and offer high value medical insurance products, 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 in two business segments: subscription business and other business. Our subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar margin profiles. This segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer products. We operate our subscription business segment similar to other subscription-based businesses, with a focus on achieving a target margin prior to our new pet acquisition expense and acquiring as many pets as possible at our targeted average estimated internal rate of return. We generate revenue in our other business segment primarily by underwriting policies on behalf of third parties that do not carry reference to the Trupanion brand. 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 in acquiring new members and measure effectiveness based on our targeted return on investment. 18 --------------------------------------------------------------------------------
Key Operating Metrics
The following table sets forth total pets enrolled and key operating metrics for
our subscription business for each of the last eight fiscal quarters.
Three Months Ended
Mar. 31, 2023 Dec. 31, 2022 Sep. 30, 2022 Jun. 30, 2022 Mar. 31, 2022 Dec. 31, 2021 Sept. 30, 2021 Jun. 30, 2021
Total Business:
Total pets enrolled (at period
end) 1,616,865 1,537,573 1,439,605 1,348,145 1,267,253 1,176,778 1,104,376 1,024,226
Subscription Business:
Total subscription pets
enrolled (at period end) 906,369 869,862 808,077 770,318 736,691 704,333 676,463 643,395
Monthly average revenue per
pet $ 63.58 $ 63.11 $ 63.80 $ 64.26 $ 64.21 $ 63.89 $ 63.60 $ 63.69
Lifetime value of a pet,
including fixed expenses $ 541 $ 641 $ 673 $ 713 $ 730 $ 717 $ 697 $ 681
Average pet acquisition cost
(PAC) $ 247 $ 283 $ 268 $ 309 $ 301 $ 306 $ 280 $ 284
Average monthly retention 98.65 % 98.69 %
98.71 % 98.74 % 98.75 % 98.74 % 98.72 % 98.72 % 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 exclude revenue from our managing general agent product lines because their revenue is representative of commission earnings versus underwriting premiums. We monitor monthly average revenue per pet because it is an indicator of the per pet unit economics of our subscription business. 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 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.
*Total pets enrolled and total subscription pets enrolled metrics include
managing general agent pets.
† Excluding activity relating to managing general agent policies.
19 -------------------------------------------------------------------------------- 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 new pet acquisition expense, excluding stock-based compensation expense, other business segment expense and managing general agent 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 new pet acquisition expenses. We exclude other business segment pet acquisition expense because that does not relate to subscription enrollments. We exclude managing general agent pet acquisition expense because the revenue of these products is representative of commission earnings versus underwriting premiums. 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.† 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 ofMarch 31, 2023 is an average of each month's retention fromApril 1, 2022 throughMarch 31, 2023 . 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.
† Excluding activity relating to managing general agent policies.
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Non-GAAP Financial Measures
In addition to our results determined in accordance withU.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 non-recurring transactions and restructuring expenses as they are 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 development expenses related to exploring and developing new products and offerings that are in the pre-revenue stage. 21 -------------------------------------------------------------------------------- The following table presents the reconciliation of our non-GAAP financial measures from corresponding GAAP measures for the periods presented (in thousands): Three Months EndedMar. 31, 2023 Dec. 31, 2022 Sep. 30, 2022 Jun. 30, 2022 Mar. 31, 2022 Dec. 31, 2021 Sept. 30, 2021 Jun. 30, 2021 Veterinary invoice expense$ 194,137 $ 176,083 $ 171,112 $ 157,616 $ 144,926 $ 132,852 $ 125,058 $ 118,282 Less: Stock-based compensation expense(1) (839) (899) (960) (1,022) (1,173) (798) (769) (672) Other business cost of paying veterinary invoices (65,149) (59,946) (58,197) (50,378) (44,336) (38,009) (34,432)
(31,029)
Subscription cost of paying veterinary invoices (non-GAAP)$ 128,149 $ 115,238 $ 111,955 $ 106,216 $ 99,417 $ 94,045 $ 89,857 $ 86,581 % of subscription revenue 77.6 % 72.7 % 73.5 % 72.8 % 71.1 % 70.1 % 70.7 % 71.9 % Other cost of revenue$ 35,846 $
36,277
$ 30,992 $ 28,443 $ 25,433 Less: Stock-based compensation expense(1) (448) (414) (433) (754) (631) (581) (542) (552) Other business variable expenses (18,743) (20,591) (17,346) (18,010) (16,506) (17,208) (15,315)
(12,940)
Subscription variable expenses (non-GAAP)$ 16,655 $
15,272
$ 13,203 $ 12,586 $ 11,941 % of subscription revenue 10.1 % 9.6 % 9.7 % 9.9 % 10.0 % 9.8 % 9.9 % 9.9 % Technology and development expense$ 4,900 $
6,955
General and administrative
expense
21,017 10,472 10,314 9,227 9,366 8,996 8,246 7,435
Less:
Stock-based compensation expense(1) (8,821) (5,019) (4,805) (4,085) (3,226) (3,293) (3,020) (3,122) Non-recurring transaction or restructuring expenses(2) (4,102) (193) (179) - - - - - Development expenses (898) (2,084) (2,435) (2,012) (1,258) (858) (919) (1,121) Fixed expenses (non-GAAP)$ 12,096 $
10,131
% of total revenue
4.7 % 4.1 % 4.0 % 4.3 % 4.9 % 4.9 % 4.8 % 4.3 % New pet acquisition expense$ 21,642 $
22,457
$ 19,845 $ 19,708 $ 19,390 Less: Stock-based compensation expense(1) (2,032) (2,079) (2,108) (2,601) (2,328) (2,136) (2,112)
(2,181)
Other business pet acquisition expense (51) (65) (181) (186) (109) (76) (134) (118) Subscription acquisition cost (non-GAAP)$ 19,559 $
20,313
$ 17,633 $ 17,462 $ 17,091 % of subscription revenue 11.8 % 12.5 % 13.2 % 13.9 % 13.7 % 13.1 % 13.7 % 14.2 %
(1)
any non-GAAP adjustments. Stock-based compensation associated with bonuses was approximately
(2) Consists of business acquisition transaction expenses, severance cost due to certain officers' departures, and a
connection with the transition of underwriting a third-party business to other insurers.
22 -------------------------------------------------------------------------------- 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, other business segment expense, and managing general agent 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. We exclude managing general agent pet acquisition expense because the revenue of these products is representative of commission earnings versus underwriting premiums. 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 new pet acquisition expenses.
The following table reconciles GAAP new pet acquisition expense to non-GAAP net
acquisition cost (in thousands) for each of the last eight fiscal quarters:
Three Months Ended
Sept. 30,
Mar. 31, 2023 Dec. 31, 2022 Sep. 30, 2022 Jun. 30, 2022 Mar. 31, 2022 Dec. 31, 2021 2021 Jun. 30, 2021
New pet acquisition expense$ 21,642 $ 22,457 $ 22,434 $ 22,982 $ 21,627 $ 19,845 $ 19,708 $ 19,390 Net of sign-up fee revenue (1,219) (1,191) (1,339) (1,252) (1,202) (1,162) (1,268) (1,260) Excluding: Stock-based compensation expense (2,032) (2,079) (2,108) (2,601) (2,328) (2,136) (2,112) (2,181) Other business pet acquisition expense (51) (65) (181) (186) (109) (76) (134) (118) Pet acquisition expense for managing general agent policies (927) (443) - - - - - - Net acquisition cost$ 17,413 $ 18,679 $ 18,806 $ 18,943 $ 17,988 $ 16,471 $ 16,194 $ 15,831
Components of Operating Results
General
We operate in two business segments: subscription business and other business. Our subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar margin profiles. This segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer 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 business 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. 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 enrollment term. Membership may be canceled at any time without penalty, and we issue a refund for the unused portion of the canceled membership. We generate revenue in our other business segment primarily from writing policies on behalf of third parties where we do not undertake the direct consumer marketing. This segment also includes revenue from other products and software solutions that have a different margin profile from 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.
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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, new pet acquisition expense, and
depreciation and amortization. For each category, except 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 geographies, 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.
New pet acquisition expense
New pet acquisition expenses primarily consist of costs, including employee
compensation, to educate veterinarians and consumers about the benefits of
print, online and promotional advertising costs.
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 and terms
of the awards under our 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.
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Factors Affecting Our Performance
Average monthly retention. Our performance depends on our ability to continue to
retain our existing and newly enrolled pets and is impacted by our ability to
provide a best-in-class value and member experience. Our ability to retain
enrolled pets depends on a number of factors, including the actual and perceived
value of our services and the quality of our member experience, the ease and
transparency of the process for reviewing and paying veterinary invoices for our
members, and the competitive environment. In addition, other initiatives across
our business may temporarily impact retention and make it difficult for us to
improve or maintain this metric. For example, if the number of new pets enrolled
increases at a faster rate than our historical experience, our average monthly
retention rate could be adversely impacted, as our retention rate is generally
lower during the first year of member enrollment.
Investment in pet acquisition. We have made and plan to continue to make
significant investments to grow our member base. Our net acquisition cost and
the number of new members we enroll depends on a number of factors, including
the amount we elect to invest in 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 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 price adjustments. Our subscription business's cost-plus model depends
on our ability to estimate our operating costs and expenses, including
veterinary invoice expenses, and to adjust our pricing to achieve our target
returns. We regularly reevaluate and adjust the price of our subscriptions, with
a goal of achieving our targeted payout ratio, subject to the review and
approval of applicable state regulators. This makes it important for us to
accurately estimate our costs and to promptly pursue and obtain regulatory
approval of pricing adjustments, which generally roll onto our book of insured
pets over the next twelve months. We may, though, have timing mismatches during
which our pricing does not reflect our current expense profile. In periods of
rapid increases in veterinary invoice expenses, including periods of significant
inflation, this timing mismatch may have a significant impact on our margin
profile.
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 number of veterinary hospitals using our patented
direct pay software, and find other ways to maintain a strong value proposition
for our members. The implementation of such initiatives could impact our expense
profile and result in us incurring expenses that may not always directly
coincide with revenue increases, resulting in fluctuations in revenue and
profitability in our subscription business segment.
Mix of sales. The relative mix of our business by geography, pet age and breed
and other factors impacts the monthly average revenue per pet we receive. For
example, prices from our plans could vary depending on the relative cost of
veterinary care in different countries or areas. As our mix of business between
geographies changes, our metrics, such as our monthly average revenue per pet,
and our exposure to foreign exchange fluctuations will be impacted. As we expand
into international markets and continue to explore other opportunities, we
expect these effects to increase.
Other business segment. Our other business segment primarily includes other
product offerings that generally have a business-to-business relationship. These
products have been, and we expect will be in the future, materially different
from our subscription business 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 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.
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Results of Operations
The following tables set forth our results of operations for the periods
presented both in absolute dollars and as a percentage of total revenue for
those periods. The period-to-period comparison of financial results is not
necessarily indicative of future results.
Three Months Ended March 31,
2023 2022
(in thousands)
Revenue:
Subscription business $ 165,210 $ 139,839
Other business 91,119 66,160
Total revenue 256,329 205,999
Cost of revenue:
Subscription business(1) 146,091 115,263
Other business 83,892 60,842
Total cost of revenue 229,983 176,105
Operating expenses:
Technology and development(1) 4,900 5,229
General and administrative(1) 21,017 9,366
New pet acquisition expense(1) 21,642 21,627
Depreciation and amortization 3,202 2,717
Total operating expenses 50,761 38,939
Loss from investment in joint venture (71) (69)
Operating loss (24,486) (9,114)
Interest expense 2,387 79
Other expense (income), net (1,902) (314)
Loss before income taxes (24,971) (8,879)
Income tax expense (benefit) (191) (24)
Net loss $ (24,780) $ (8,855)
(1) Includes stock-based compensation expense as follows:
Three Months Ended March 31,
2023 2022
(in thousands)
Cost of revenue $ 1,318 $ 1,836
Technology and development
708 908
General and administrative
8,219 2,423
New pet acquisition expense
2,086 2,382
Total stock-based compensation expense
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Three Months Ended March
31,
2023 2022
(as a percentage of revenue)
Revenue 100 % 100 %
Cost of revenue 90 85
Operating expenses:
Technology and development 2 3
General and administrative 8 5
New pet acquisition expense 8 10
Depreciation and amortization 1 1
Total operating expenses 20 19
Loss from investment in joint venture - -
Operating loss (10) (4)
Interest expense 1 -
Other expense (income), net (1) -
Loss before income taxes (10) (4)
Income tax expense (benefit) - -
Net loss (10) % (4) %
Stock-based compensation expense: Three Months Ended March 31,
2023 2022
(as a percentage of revenue)
Cost of revenue 1 % 1 %
Technology and development - -
General and administrative 3 1
New pet acquisition expense 1 1
Total stock-based compensation expense 5 %
4 %
Three Months Ended
2023 2022
(as a percentage of subscription revenue)
Subscription business revenue 100 % 100 %
Subscription business cost of revenue 88 82
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Comparison of the Three Months Ended
Revenue
Three Months Ended March
31,
2023 2022 % Change
(in thousands, except percentages, pet and per pet data)
Revenue:
Subscription business $ 165,210 $ 139,839 18 %
Other business 91,119 66,160 38
Total revenue $ 256,329 $ 205,999 24
Percentage of Revenue by Segment:
Subscription business 64 % 68 %
Other business 36 32
Total revenue 100 % 100 %
Total pets enrolled (at period end) 1,616,865 1,267,253 28
Total subscription pets enrolled (at period end) 906,369 736,691 23
Monthly average revenue per pet $ 63.58 $ 64.21 (1)
Average monthly retention 98.65 % 98.75 %
Three months ended March 31, 2023 compared to three months ended March 31, 2022 .
Total revenue increased by $50.3 million , to $256.3 million for the three months
ended March 31, 2023 , or 24%. Revenue from our subscription business segment
increased by $25.4 million to $165.2 million for the three months ended March
31, 2023 , or 18%. This increase was primarily due to a 19% increase in total
subscription pets enrolled, excluding pets acquired through business
combinations, between compared periods. Revenue from our other business segment
increased by $25.0 million to $91.1 million , or 38%, for the three months ended
March 31, 2023 , primarily due to a 34% increase in enrolled pets in this
segment.
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Cost of Revenue
Three Months Ended March
31,
2023 2022 % Change
(in thousands, except percentages, pet and per pet data)
Cost of Revenue:
Subscription business:
Veterinary invoice expense $ 128,988 $ 100,590 28 %
Other cost of revenue 17,103 14,673 17
Total cost of revenue 146,091 115,263 27
Other business:
Veterinary invoice expense 65,149 44,336 47
Other cost of revenue 18,743 16,506 14
Total cost of revenue $ 83,892 $ 60,842 38
Percentage of Revenue by Segment:
Subscription business:
Veterinary invoice expense 78 % 72 %
Other cost of revenue 10 10
Total cost of revenue 88 82
Other business:
Veterinary invoice expense 71 67
Other cost of revenue 21 25
Total cost of revenue 92 % 92 %
Total pets enrolled (at period end) 1,616,865 1,267,253 28
Total subscription pets enrolled (at period end) 906,369 736,691 23
Monthly average revenue per pet $ 63.58 $ 64.21 (1)
Three months ended March 31, 2023 compared to three months ended March 31, 2022 .
Cost of revenue for our subscription business segment was $146.1 million , or 88%
of revenue, for the three months ended March 31, 2023 , compared to $115.3
million , or 82% of revenue, for the three months ended March 31, 2022 . This
increase of 27% in subscription cost of revenue was primarily the result of a
19% increase in subscription pets enrolled, excluding pets acquired as part of
business combinations, as well as rising veterinary invoice expenses in the
current inflationary environment. Additionally, as part of our long-term
strategy to install more software and pay veterinary hospitals directly, the
ease of submitting claims via our patented software has led to increased claims
received and short-term pressure on our margin in the current period. Cost of
revenue for our other business segment increased by $23.1 million , or 38%, to
$83.9 million for the three months ended March 31, 2023 , primarily due to the
increase in enrolled pets in this segment.
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Technology and Development Expenses
Three Months Ended March
31,
2023 2022 % Change
(in thousands, except percentages)
Technology and development $ 4,900 $ 5,229 (6) %
Percentage of total revenue 2 % 3 %
Three months ended March 31, 2023 compared to three months ended March 31, 2022 .
Technology and development expenses decreased by $0.3 million , or 6%, to $4.9
million for the three months ended March 31, 2023 , driven primarily by a
decrease of $0.8 million in development expense as several initiatives that were
pre-revenue in the prior year moved out of development, partially offset by $0.6
million of higher compensation expenses primarily due to increased headcount.
Technology and development expenses decreased from 3% to 2% of total revenue
year over year.
General and Administrative Expenses
Three Months Ended March
31,
2023 2022 % Change
(in thousands, except percentages)
General and administrative $ 21,017 $ 9,366 124 %
Percentage of total revenue 8 % 5 %
Three months ended March 31, 2023 compared to three months ended March 31, 2022 .
General and administrative expenses increased by $11.7 million , or 124%, to
$21.0 million for the three months ended March 31, 2023 . The increase in expense
was primarily due to a $5.8 million increase in stock-based compensation, of
which $4.8 million related to charges after certain executive officers'
departures. Additionally, there was a $3.8 million increase related to a
negotiated settlement of uncollected premiums in connection with the transition
of underwriting a third-party business to other insurers, a $0.9 million
increase in general compensation expense, and a $0.4 million increase in
professional services. General and administrative expenses increased from 5% to
8% of total revenue year over year primarily due to these non-recurring charges
in the current period.
New Pet Acquisition Expense
Three Months Ended March
31,
2023 2022 % Change
(in thousands, except percentages, pet and per pet data)
New pet acquisition expense $ 21,642 $ 21,627 - %
Percentage of total revenue 8 % 10 %
Subscription Business:
Total subscription pets enrolled (at period end) 906,369 736,691 23
Average pet acquisition cost (PAC) $ 247 $ 301 (18)
Three months ended March 31, 2023 compared to three months ended March 31, 2022 .
New pet acquisition expenses were $21.6 million , for the three months ended
March 31, 2023 which is consistent with the same period in the prior year. Total
subscription pets enrolled increased 19%, excluding pets acquired through
business combinations. New pet acquisition expenses as a percentage of revenue
was 8% for the three months ended March 31, 2023 , compared to 10% in the same
period last year, as we were able to stay disciplined within our targeted
internal rate of return range for our discretionary pet acquisition spend, while
still maintaining a relatively high level of pet enrollment growth.
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Depreciation and Amortization
Three Months Ended March
31,
2023 2022 % Change
(in thousands, except percentages)
Depreciation and amortization $ 3,202 $ 2,717 18%
Percentage of total revenue 1 % 1 %
Three months ended March 31, 2023 compared to three months ended March 31, 2022 .
Depreciation and amortization expense increased by $0.5 million , or 18%, to $3.2
million for the three months ended March 31, 2023 .
Stock-Based Compensation
Three months endedMarch 31, 2023 compared to three months endedMarch 31, 2022 . 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$12.3 million for the three months endedMarch 31, 2023 , up from$7.5 million in the prior year period. The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants, calculated according to our equity incentive plan. In addition, there was a$4.8 million increase in stock-based compensation in the period as a result of charges after certain executive officers' departures. 31 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The following table summarizes our cash flows for the periods indicated (in
thousands):
Three Months Ended March 31,
2023 2022
Net cash provided by (used in) operating activities $ (6,862) $ (3,590)
Net cash provided by (used in) investing activities 33,914 (14,251)
Net cash provided by (used in) financing activities 33,810 52,765
Effect of foreign exchange rates on cash, cash equivalents, and
restricted cash, net
260 139
Net change in cash, cash equivalents and restricted cash
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. We have certain contractual obligations in the normal course of business, including obligations and commitments relating to our credit facility (the Credit Facility) withPiper Sandler Finance, LLC , acting as the administrative agent, non-cancellable vendor purchase agreements, as well as future payments of veterinary invoice claims. Refer to Note 8, Reserve for Veterinary Invoices, included in Item 1 of Part I of this report, for further details on anticipated cash outflows. Our primary sources of liquidity are cash provided by operations and available borrowings from our Credit Facility. 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. As ofMarch 31, 2023 , we had$244.6 million in cash, cash equivalents and short-term investments and$40.0 million available under our Credit Facility. The Credit Facility is secured by substantially all of our assets and those of our subsidiaries. In addition, 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 ofMarch 31, 2023 , total assets and liabilities held outside of our insurance entities were$227.9 million and$134.6 million , respectively, including$8.4 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". InApril 2021 , our board of directors approved a share repurchase program, pursuant to which we may, betweenMay 2021 andMay 2026 , repurchase outstanding shares of our common stock. While our board of directors has approved the program, any repurchase activity is subject to quarterly assessment and board approval, based on various factors including available cash, stock price relative to our estimated intrinsic value, forecasted operating results, and available opportunities to otherwise deploy capital for business expansion. We repurchased no shares under this program during the three months endedMarch 31, 2023 . 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, develop new product offerings and to fund projects that improve our members' experience. Net cash used by operating activities was$6.9 million for the three months endedMarch 31, 2023 , compared to$3.6 million for the three months endedMarch 31, 2022 . The change was primarily driven by increased veterinary invoice expenses in the current inflationary environment as well as increased utilization of our claims software.
Investing Cash Flows
Net cash provided by investing activities was$33.9 million for the three months endedMarch 31, 2023 , compared to$14.3 million net cash used by investing activities for the three months endedMarch 31, 2022 . The change was primarily related to reinvestment of proceeds from matured short-term investments to cash equivalents, partially offset by an increase in capital expenditures, primarily attributable to development of internal-use software focused on member experience improvements.
Financing Cash Flows
Net cash provided by financing activities was$33.8 million for the three months endedMarch 31, 2023 , compared to$52.8 million for the three months endedMarch 31, 2022 . The change was primarily due to a decrease in net proceeds related to the credit facility. 32
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Long-Term Debt
Our Credit Facility provides us with up to$150.0 million of credit. As ofMarch 31, 2023 , we issued term loans totaling$110.0 million under the Credit Facility. Refer to Note 9, Debt, included in Item 1 of Part I of this report, for further details. Regulation As ofMarch 31, 2023 , our insurance entities collectively held$117.9 million in short-term investments and$324.7 million in other current assets, including$75.6 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.
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, 2022 , APIC was required to maintain at least$142.4 million of risk-based capital to avoid this additional regulatory oversight. As of that date, APIC maintained$162.2 million of risk-based capital.
Company
In 2021, we established two new wholly-owned insurance subsidiaries, ZPIC and QPIC, domiciled inMissouri andNebraska , respectively, and in 2023 we established a new wholly-owned insurance subsidiary, GPIC, domiciled inCanada . We have funded required statutory capital to these new subsidiaries. As ofMarch 31, 2023 , neither ZPIC, QPIC nor GPIC have begun underwriting any insurance policies.
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. InFebruary 2023 , our parent entity received a dividend of$7.3 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 ofMarch 31, 2023 , the account held CAD$11.2 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. 33 --------------------------------------------------------------------------------
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. InMarch 2022 , we entered into a credit agreement that provides us with up to$150 million of credit, including a$60 million initial term loan that was funded at closing and an aggregate$50 million of delayed draw term loans funded betweenDecember 2022 andFebruary 2023 . Refer to Note 9, Debt, included in Item 1 of Part I of this report, for further details, including interest and future principal payments.
Critical Accounting 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 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 estimates as
compared to those described in our Annual Report on Form 10-K for the fiscal
year ended
34
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U S PHYSICAL THERAPY INC /NV – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
REGIONAL MANAGEMENT CORP. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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