Trupanion, Inc. — Form 10-Q Summary
Business context and reporting period
Trupanion provides direct-to-consumer monthly medical-plan subscriptions for cats and dogs in the United States, Canada and Puerto Rico. The filing covers the three and six months ended June 30, 2014; financial statements are unaudited and presented under U.S. GAAP. The company operates subscription and other business segments.
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $28.1 million | $19.8 million | $53.7 million | $37.7 million |
| Gross profit | $5.2 million | $3.8 million | $9.9 million | $7.4 million |
| Gross margin | 18% | 19% | 18% | 20% |
| Operating loss | $(3.5) million | $(1.6) million | $(6.4) million | $(3.4) million |
| Net loss | $(3.5) million | $(1.8) million | $(8.4) million | $(3.8) million |
| Net loss per share | $(2.25) | $(1.32) | $(5.47) | $(3.03) |
- Subscription revenue increased 38% in Q2 and 37% year to date, while other-business revenue increased 85% in Q2 and 130% year to date.
- Total pets enrolled increased 32% year over year to 194,617. Monthly adjusted revenue per pet rose 4% in Q2 and 3% year to date. Average monthly retention improved modestly to 98.65% from 98.62%.
- Claims expenses increased 40% in Q2 and 39% year to date. Consolidated cost of revenue rose to 82% of revenue year to date from 80%.
- Operating expenses increased to $8.7 million in Q2 and $16.3 million year to date. Technology and development expense increased 122% in Q2 and 134% year to date, reflecting claims-processing, website and customer-relationship-system investments.
- Sales and marketing expense increased 24% in Q2 and 13% year to date. Q2 average pet acquisition cost was $113 versus $99 in the prior-year quarter; management reported a lifetime-value-to-acquisition-cost ratio of 5.4.
- Net cash used in operating activities was $6.4 million for the first six months, compared with $1.7 million in the prior-year period. Net cash decreased $5.7 million to $9.3 million at June 30, 2014.
- At June 30, cash and cash equivalents were $9.3 million, fixed-maturity investments were approximately $15.0 million including restricted cash, and total assets were $48.8 million.
- Debt principal totaled $29.6 million at June 30, consisting of a $14.9 million revolving line, a $2.7 million term loan and a $12.0 million subordinated term loan. Debt carrying value was $26.2 million after discount. Substantially all assets were pledged as collateral.
- The company had a $44.4 million accumulated deficit and $40.0 million of stockholders’ deficit at June 30, 2014.
Material changes versus the prior comparable period
- Revenue growth was strong, driven by 32% membership growth, pricing and coverage changes, and increased policies written for an unaffiliated managing general agent. However, gross margin declined by approximately two percentage points year to date.
- Operating losses widened substantially as technology, general and administrative, and claims-related costs grew faster than revenue. General and administrative expense increased 63% in Q2 and 54% year to date, including public-company preparation costs and a $0.4 million severance charge.
- Interest expense increased to $1.5 million year to date from $0.3 million, primarily due to the December 2013 subordinated term loan.
- Operating cash burn increased materially, and the company remained dependent on financing while continuing to invest in growth and technology.
Guidance, outlook, commentary and risks
- Management expects continued investment in member acquisition, technology, member experience, personnel and public-company infrastructure. It expects operating expenses and operating cash use to remain elevated and does not provide a clear GAAP profitability timetable in this filing.
- Management stated that cash, investments and the subsequent IPO proceeds were expected to fund operations and statutory capital requirements for at least the next 12 months.
- APIC held most statutory investments and was subject to insurance risk-based-capital requirements. At December 31, 2013, APIC had $16.3 million of risk-based capital versus $16.8 million required for the No Action Level and submitted a capital plan to the New York Department of Financial Services.
- The company does not purchase reinsurance; adverse claims frequency or severity, reserve inadequacy, veterinary-cost inflation or pricing errors could materially affect results.
- California insurance regulators issued a notice of non-compliance concerning trial policies. Washington regulators scheduled a regulatory examination concerning licensing and compliance. The company had accrued $0.1 million for the California matter and could not estimate additional exposure.
- The company accrued $1.0 million for Canadian GST/HST and related interest for 2007–2013 and submitted a voluntary disclosure to Canadian authorities.
- Other key risks include dependence on veterinary referrals and Territory Partners, retention and acquisition-cost volatility, competition, regulatory restrictions on insurance pricing and licensing, technology and data-security failures, foreign-exchange exposure, and continued losses.
- On July 23, 2014, after the reporting date, the company completed its IPO of 8,193,750 shares at $10.00 per share and received approximately $72.9 million of net proceeds. It used $12.0 million to repay the subordinated term loan and repaid the remaining $29.0 million term loan, accrued interest and a $0.3 million prepayment penalty in full.
- The IPO also converted outstanding preferred stock and exchangeable shares into common stock and reclassified outstanding warrants from liabilities to equity.
Most important facts for investors to verify
- Whether rapid revenue and pet-enrollment growth can translate into improving gross margins and eventual profitability.
- The adequacy of the $4.4 million claims reserve and the effect of the company’s decision not to purchase reinsurance.
- APIC’s current risk-based-capital status, regulatory response and restrictions on transferring statutory assets to the parent.
- The outcome and potential financial impact of the California and Washington regulatory matters and the Canadian GST/HST disclosure.
- Post-IPO cash usage, debt repayment effects, dilution from preferred-stock conversions, options and warrants, and the company’s continuing operating cash burn.
- Whether retention, lifetime value and pet acquisition cost trends support management’s stated long-term 5:1 lifetime-value-to-acquisition-cost target.