reconciliation of gross profit to contribution margin, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures.”
The following tables set forth our key financial and operating metrics for our subscription business for the periods ended December 31, 2014, 2013 and 2012:
Average pet acquisition cost. Pet acquisition cost (PAC) is calculated as acquisition cost divided by the total number of new pets enrolled in that period. Acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as sales and marketing expenses, excluding stock-based compensation, offset by sign-up fee revenue. We offset sales and marketing expenses with sign-up fee revenue since it is a one-time charge to new members used to partially offset initial setup costs, which are included in sales and marketing expenses. 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.
Technology and development expenses primarily consist of personnel costs and related expenses for our operations staff, which includes information technology development and infrastructure support, third-party services and depreciation of hardware and amortization of capitalized software and intangible assets. We expect technology and development expenses to increase in absolute dollars and as a percentage of total revenue in the near term as we
Year ended December 31, 2013 compared to year ended December 31, 2012. Cost of revenue for our subscription business segment increased $17.7 million to $61.9 million for the year ended December 31, 2013, or 40%. This increase was primarily a result of the $16.0 million increase in claims expenses resulting from the 35% increase in enrolled pets, offset by a $0.5 million benefit from fluctuating foreign exchange rates on our Canadian dollar-denominated payments to Canadian members. Other cost of revenue decreased as a percentage of revenue due to economies of scale resulting from the timing of a headcount increase in 2012, which we made in anticipation of continued growth in 2013.
Year ended December 31, 2014 compared to year ended December 31, 2013. Sales and marketing expenses increased $2.5 million to $11.6 million for the year ended December 31, 2014, or 28%. The increase in sales and marketing expenses was primarily due to an increase of $0.7 million in expenditures related to new and expanded online marketing initiatives, a $0.7 million increase in print advertising and brand development and a $0.6 million increase related to developing our territory partner network. Additionally, compensation related costs increased $0.3 million due to increased headcount. Finally, commissions to our territory partners increased $0.2 million based on increased enrollments.
Since inception, we have financed our operations and met capital requirements primarily through the sale of equity securities and from borrowings. Our principal uses of cash are paying claims, funding operations and capital requirements, investing in new member acquisition and enhancements to our member experience and servicing debt. In July 2014, we closed our IPO, pursuant to which we sold 8,193,750 shares of common stock at an offering price of $10.00 per share. We received net proceeds of approximately $72.8 million.
All warrants were classified as liabilities as of December 31, 2013 and until July 2014, as they were for redeemable shares and contained terms that allowed for the modification of the exercise price or the number of shares issuable upon exercise. Warrants to purchase shares of common stock and convertible preferred stock were recorded as a discount on the related debt and as a liability at fair value on the date of issuance. The fair value of the award was estimated on the grant date using the Black-Scholes-Merton option-pricing model. The discount on debt was accreted to interest expense using the effective interest method over the term of the related loan until payoff in July 2014, at which point the remaining discount on debt was amortized. The warrant liability was revalued each period and recorded at fair value as of the period end date with any gain or loss in value recorded in other expense, net in our consolidated statement of operations until the warrants were redeemed or the modification terms were settled in July 2014.
likelihood of achieving a liquidity event, such as an IPO; and
Technology and development expenses consist primarily of personnel costs and related expenses for the Company’s operations staff, which includes information technology development and infrastructure support, third-party services and depreciation of hardware and amortization of capitalized software and intangible assets.
The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at the exchange rates in effect on the balance sheet date. Revenue and expenses for each subsidiary are translated to U.S. dollars using a weighted-average rate for the relevant reporting period. Translation adjustments resulting from this process are included in accumulated other comprehensive loss. Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in an entity’s functional currency are included within other income.
The Company capitalized interest of $0.2 million, $0.1 million and $0.03 million in 2014, 2013 and 2012, respectively, related to software developed for internal use.
The Company’s subsidiary, APIC, a New York corporation, received an inquiry from the California Department of Insurance (CDOI) in 2011 alleging APIC’s trial insurance policies issued in California are in violation of California law. The Company has disputed this assertion. In July 2014, the CDOI filed a notice of non-compliance regarding this issue. As of December 31, 2014, the Company had accrued liabilities of $0.4 million for this matter. On February 12, 2015, APIC and CDOI entered into a Stipulation and Waiver whereby APIC voluntarily agreed to remove its trial certificate program in favor of a new program that has been pre-approved by the CDOI. APIC also agreed to pay a fine and reimburse CDOI expenses in an aggregate amount of $0.4 million. Pursuant to the stipulation, APIC did not admit any wrongdoing and continues to believe that its program was permissible under California law; however, the Company determined that it was in its best interest to resolve the dispute amicably.