TRUPANION, INC. quarterly report, Q2 FY2019

Trupanion, Inc. — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2019, compared with the comparable 2018 periods. Trupanion provides medical insurance for cats and dogs in the United States, Canada and Puerto Rico through subscription and other business segments.

Financial Performance

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Revenue	$92.2 million	$73.4 million	$179.2 million	$143.2 million
Gross profit	$14.7 million	$12.4 million	$29.7 million	$23.4 million
Gross margin	16%	17%	17%	16%
Operating loss	$(2.1) million	$(0.3) million	$(3.4) million	$(1.8) million
Net loss	$(1.9) million	$(0.4) million	$(3.2) million	$(1.9) million
Net loss per diluted share	$(0.06)	$(0.01)	$(0.09)	$(0.06)
Operating cash flow	Not separately provided	Not separately provided	$6.9 million	$1.6 million

Revenue growth: Q2 revenue increased 26%; six-month revenue increased 25%. Subscription revenue rose 22% in Q2 and 21% year to date. Other-business revenue rose 52% in Q2 and 53% year to date.
Profitability: Gross profit increased, but gross margin declined to 16% in Q2 from 17%, while operating and net losses widened as sales and marketing investment increased.
Operating expenses: Q2 sales and marketing expense increased 54% to $8.8 million; six-month expense increased 46% to $17.0 million. Technology and development increased 12% in Q2 and 18% year to date. General and administrative expense increased 13% in Q2 and 17% year to date.
Operating metrics: Total pets enrolled reached 577,686, up 22% year over year; subscription pets reached 461,314, up 15%. Monthly average revenue per pet increased 6% in Q2 to $57.11 and 5% for the six-month period to $56.63. Average monthly retention was 98.57%, compared with 98.64% in the prior-year period.
Customer acquisition: Average pet acquisition cost increased 42% in Q2 to $213 and 32% for the six-month period to $209. Lifetime value of a pet was $722 for the six-month period, compared with $732 in 2018.

Liquidity, Capital and Debt

At June 30, 2019, cash and cash equivalents were $27.4 million, short-term investments were $64.7 million, and long-term investments were $3.9 million.
Total assets were $230.5 million and stockholders’ equity was $131.0 million.
Long-term debt was $19.1 million, including approximately $19.2 million of borrowings under the revolving credit facility before financing-fee presentation.
The revolving credit facility provides up to $50.0 million, matures in June 2022, and had $30.3 million of available borrowing capacity at June 30, 2019, subject to borrowing-base and other limitations. The interest rate was the greater of 4.5% or 0.75% plus prime.
The company was in compliance with all stated credit-facility covenants. Restricted cash was $1.4 million.
Six-month investing cash outflow was $13.6 million, primarily from net purchases of investments and capital expenditures. Financing cash inflow was $7.1 million, including $6.2 million of net debt financing and $1.6 million from option exercises.
Management stated that cash, cash equivalents, short-term investments and available credit were sufficient to fund operations and capital requirements for the next 12 months, while noting that additional financing may be pursued as the business grows.

Material Changes Versus Prior Comparable Period

Growth was driven by higher enrollment, increased revenue per pet and substantial expansion in the other-business segment.
Veterinary invoice expense rose 23% in Q2 and 21% year to date for the subscription segment. Management attributed the increase primarily to enrollment growth and higher veterinary-care cost and utilization.
Subscription gross margin declined from 18% to 17% in Q2 and remained 18% for the six-month period. Other-business gross margin remained approximately 9% in Q2 and improved to 9% for the six-month period from 8%.
Sales and marketing spending increased faster than revenue, reflecting greater lead-generation, conversion and personnel investment. This contributed to wider operating and net losses.
The company adopted ASC 842 leases effective January 1, 2019, recording approximately $0.1 million of operating lease right-of-use assets and liabilities, with no material effect on earnings or cash flows.
Warrants to purchase 480,000 shares were exercised during the first six months, leaving no warrants outstanding at June 30, 2019. Shares outstanding increased year over year, contributing to dilution considerations.

Outlook, Commentary and Risks

No specific quantitative revenue, earnings or enrollment guidance is clearly provided in the filing text. Management expects continued investment in member acquisition, member retention, technology and member experience.
Key operating risks include continued net losses, rising pet acquisition costs, the possibility that retention or lifetime value declines, and the risk that veterinary invoice costs exceed reserves.
The veterinary invoice reserve was $18.3 million at June 30, 2019. Reserve estimates rely on actuarial methods and management assumptions and may materially affect future results if revised.
Insurance subsidiaries must maintain regulatory capital and surplus. Growth may increase required capital, and regulatory restrictions may limit the use of insurance-subsidiary assets for general corporate purposes.
The company is addressing legacy questions from certain state regulators regarding whether employees assisting prospective members by telephone required insurance licenses. Management stated that prior matters were resolved in non-material amounts, that it believes it is compliant, and that adequate reserves have been recorded for remaining matters.
Other risks include regulatory approval of pricing changes, competition, dependence on veterinarians and referral partners, contract termination in the other-business segment, cybersecurity and technology failures, foreign-exchange exposure, litigation, and credit-facility covenant compliance.
Management reported effective disclosure controls and procedures as of June 30, 2019, with no material changes to internal control over financial reporting identified during the period.

Investor Verification Checklist

Verify whether enrollment growth and revenue per pet continue to offset higher veterinary costs and declining or pressured gross margins.
Monitor average pet acquisition cost, lifetime value, retention and the return on increased sales and marketing spending.
Reconcile cash and investments that are available for corporate use with assets restricted by insurance regulations, trusts and statutory-capital requirements.
Review the revolving credit facility’s borrowing-base limitations, financial covenants, interest costs and available capacity.
Assess the adequacy of veterinary invoice reserves and the effect of future actuarial adjustments.
Track the status of state regulatory licensing inquiries, required pricing approvals and any related legal or compliance costs.
Confirm whether the company achieves profitability or requires additional equity or debt financing to support growth and regulatory capital needs.