Trupanion Reports Third Quarter 2016 Results

Total revenue of $48.4 million, up 28% year-over-year
334,070 total enrolled pets at quarter-end, up 21% year-over-year

SEATTLE, Nov. 01, 2016 -- Trupanion, Inc. (Nasdaq:TRUP), a leading provider of medical insurance for cats and dogs, today announced financial results for the third quarter ended September 30, 2016.

“Our third quarter financial performance reflects our continued focus on balancing revenue growth against return on investment spend,” said Darryl Rawlings, CEO of Trupanion. “We again realized positive free cash flow in the quarter. Our strong financial position enables us to invest in the continued growth of Trupanion through cost effective pet acquisition and by improving the customer experience.”

Third Quarter 2016 Financial and Business Highlights

Total revenue was $48.4 million, an increase of 28% compared to the third quarter of 2015.
Total enrolled pets (including pets from our other business segment) was 334,070 at September 30, 2016, up 21% over the prior year period.
Subscription business revenue was $44.6 million, an increase of 30% compared to the third quarter of 2015.
Subscription pets enrolled was 312,282 at September 30, 2016, up 21% over the prior year period.
Net loss was $(1.6) million, compared to a net loss of $(4.6) million in the third quarter of 2015.
Adjusted EBITDA was $0.3 million, compared to a loss of $(3.2) million in the third quarter of 2015.

Year-to-date 2016 Financial and Business Highlights

Total revenue was $136.9 million, an increase of 28% compared to the first nine months of 2015 (29% on a constant currency basis).
Subscription business revenue was $125.9 million, an increase of 30% compared to the first nine months of 2015 (32% on a constant currency basis).
Net loss was $(5.2) million, compared to a net loss of $(14.2) million in the first nine months of 2015.
Adjusted EBITDA was a loss of $(0.2) million, compared to a loss of $(9.7) million in the first nine months of 2015.
As of September 30, 2016 there were 29.2 million basic shares outstanding and 33.1 million shares outstanding on a fully diluted basis.

Revenue by Quarter

A chart accompanying this release is available at
http://www.globenewswire.com/NewsRoom/AttachmentNg/6d152868-e543-476f-a8e8-ad9d1cec6138

Conference Call
Trupanion’s management will host a conference call today to review its third quarter 2016 results. The call is scheduled to begin shortly after 1:30 p.m. PT/ 4:30 p.m. ET. A live webcast will be accessible through the Investor Relations section of Trupanion’s website at http://investors.trupanion.com and will be archived online for 3 months upon completion of the conference call. Participants can access the conference call by dialing 1-877-407-0784 (United States) or 1-201-689-8560 (International). A telephonic replay of the call will also be available, one hour after the completion of the call, by dialing 1-844-512-2921 (United States) or 1-412-317-6671 (International) and entering the replay pin number: 13646031.

About Trupanion
Trupanion is a leading provider of medical insurance for cats and dogs throughout the United States and Canada. For almost two decades, Trupanion has given pet owners peace of mind so they can focus on their pet’s recovery, not financial stress. Trupanion is committed to providing pet owners with the highest value in pet medical insurance. Trupanion is listed on the Nasdaq Stock Exchange under the symbol TRUP. The company was founded in 2000 and is headquartered in Seattle, WA. Trupanion policies are issued, in the United States, by its wholly-owned insurance entity American Pet Insurance Company and, in Canada, by Omega General Insurance Company. For more information please visit Trupanion.com.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to, among other things, expectations, plans, prospects and financial results for Trupanion, including, but not limited to, its expectations regarding its ability to execute its business plans and financial objectives and its future operating results and expenditures. These forward-looking statements are based upon the current expectations and beliefs of Trupanion’s management as of the date of this press release, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. All forward-looking statements made in this press release are based on information available to Trupanion as of the date hereof, and Trupanion has no obligation to update these forward-looking statements.

In particular, the following factors, among others, could cause results to differ materially from those expressed or implied by such forward-looking statements: the ability to achieve or maintain profitability and/or appropriate levels of cash flow in future periods; the accuracy of assumptions used in determining appropriate member acquisition expenditures; the severity and frequency of claims; the ability to maintain high retention rates; the accuracy of assumptions used in pricing medical plan subscriptions and the ability to accurately estimate the impact of new products or offerings on claims frequency; actual claims expense exceeding estimates; regulatory and other constraints on the ability to institute, or the decision to otherwise delay, pricing modifications in response to changes in actual or estimated claims expense; the effectiveness and statutory or regulatory compliance of our Territory Partner model and of our Territory Partners, veterinarians and other third parties in recommending medical plan subscriptions to potential members; the ability to increase the number of Territory Partners and active hospitals; compliance by us and those referring us members with laws and regulations that apply to our business, including the sale of a pet medical plan; fluctuations in the Canadian currency exchange rate; the ability to protect our proprietary and member information; the ability to maintain our culture and team; the ability to maintain the requisite amount of risk-based capital; the ability to protect and enforce Trupanion’s intellectual property rights; third-party claims including litigation and regulatory actions; and the ability to recognize benefits from investments in new solutions and enhancements to Trupanion’s technology platform and website.

For a detailed discussion of these and other cautionary statements, please refer to the risk factors discussed in filings with the Securities and Exchange Commission (SEC), including but not limited to, Trupanion’s Annual Report on Form 10-K for the year ended December 31, 2015 and any subsequently filed reports on Forms 10-Q and 8-K. All documents are available through the SEC’s Electronic Data Gathering Analysis and Retrieval system at www.sec.gov or the Investor Relations section of Trupanion’s website at http://investors.trupanion.com.

Non-GAAP Financial Measures
Trupanion’s stated results may include certain non-GAAP financial measures, including, without limitation, free cash flow, acquisition cost, net acquisition cost, cost of goods, variable expenses, fixed expenses, non-GAAP subscription gross profit, non-GAAP gross profit, and adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that Trupanion defines as net loss excluding stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, income tax expense (benefit), and loss (income) from equity method investment.

Trupanion’s non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in its industry as other companies in its industry may calculate or use non-GAAP financial measures differently. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact on Trupanion’s reported financial results. Further, stock-based compensation expense and other items used in the calculation of various metrics have been and will continue to be for the foreseeable future significant recurring expenses in Trupanion’s business. 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. Trupanion urges its investors to review the reconciliation of its non-GAAP financial measures to the most directly comparable GAAP financial measures in its consolidated financial statements, and not to rely on any single financial or operating measure to evaluate its business, which are included below and on Trupanion’s Investors Relations website.

Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact a company’s non-cash expenses, Trupanion believes that providing various non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between its operating results from period to period. Trupanion calculates non-GAAP gross profit by subtracting cost of goods and variable expenses from revenue. Cost of goods and variable expenses used in this calculation are non-GAAP measures which exclude stock-based compensation expense. Fixed expenses is a non-GAAP measure which excludes stock-based compensation expense and depreciation and amortization expense. Trupanion excludes sign-up fee revenue from the calculation of net acquisition cost because it collects sign-up fee revenue from new members at the time of enrollment and considers it to be an offset to a portion of Trupanion’s sales and marketing expenses. Trupanion believes this allows it to calculate and present acquisition cost, net acquisition cost and the related financial measures it derives from them, as well as adjusted EBITDA, in a consistent manner across periods. Trupanion’s management believes that the non-GAAP financial measures and the related financial measures derived from them are important tools for financial and operational decision-making and for evaluating operating results over different periods of time.

Trupanion, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(unaudited)
Revenue:
Subscription business	$	44,629		$	34,420		$	125,934		$	96,684
Other business		3,730			3,445			10,956			10,078
Total revenue		48,359			37,865			136,890			106,762
Cost of revenue:
Subscription business ⁽¹⁾		36,432			28,146			102,793			79,572
Other business		3,427			3,128			10,027			9,231
Total cost of revenue ⁽²⁾		39,859			31,274			112,820			88,803
Gross profit:
Subscription business		8,197			6,274			23,141			17,112
Other business		303			317			929			847
Total gross profit		8,500			6,591			24,070			17,959
Operating expenses:
Sales and marketing ⁽¹⁾		3,892			4,128			11,296			11,312
Technology and development ⁽¹⁾		2,339			3,005			6,790			8,683
General and administrative ⁽¹⁾		3,811			4,067			11,028			11,760
Total operating expenses		10,042			11,200			29,114			31,755
Operating loss		(1,542	)		(4,609	)		(5,044	)		(13,796	)
Interest expense		66			14			137			298
Other expense (income), net		16			4			(39	)		8
Loss before income taxes		(1,624	)		(4,627	)		(5,142	)		(14,102	)
Income tax expense		13			16			31			102
Net loss	$	(1,637	)	$	(4,643	)	$	(5,173	)	$	(14,204	)

Net loss per share:
Basic and diluted	$	(0.06	)	$	(0.17	)	$	(0.18	)	$	(0.52	)
Weighted-average shares used to compute net loss per share:
Basic and diluted		28,732,417			27,755,310			28,362,084			27,564,975

⁽¹⁾ Includes stock-based compensation expense as follows:
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Cost of revenue	$	83		$	68		$	215		$	195
Sales and marketing		172			102			419			342
Technology and development		67			97			158			311
General and administrative		454			482			1,423			1,501
Total stock-based compensation expense	$	776		$	749		$	2,215		$	2,349

⁽²⁾The breakout of cost of revenue between claims and other cost of revenue is as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Claims expense	$	34,253		$	26,604		$	97,323		$	75,442
Other cost of revenue		5,606			4,670			15,497			13,361
Total cost of revenue	$	39,859		$	31,274		$	112,820		$	88,803

Trupanion, Inc.
Consolidated Balance Sheets
(in thousands, except for share data)



	September 30, 2016			December 31, 2015
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	20,626		$	17,956
Short-term investments		28,720			25,288
Accounts and other receivables		10,286			8,196
Prepaid expenses and other assets		1,919			2,193
Total current assets		61,551			53,633
Long-term investments, at fair value		2,500			2,388
Equity method investment		289			300
Property and equipment, net		9,188			9,719
Intangible assets, net		4,894			4,854
Other long term assets		89			23
Total assets	$	78,511		$	70,917
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,284		$	1,289
Accrued liabilities		3,489			4,189
Claims reserve		8,362			6,274
Deferred revenue		13,171			11,042
Deferred tax liabilities		169			169
Other payables		987			654
Total current liabilities		27,462			23,617
Long-term debt		3,969			-
Deferred tax liabilities		1,433			1,433
Other liabilities		858			511
Total liabilities		33,722			25,561
Stockholders’ equity:
Common stock, $0.00001 par value per share, 100,000,000 shares authorized at September 30, 2016 and 200,000,000 shares authorized at December 31, 2015, 29,870,771 and 29,249,792 shares issued and outstanding at September 30, 2016; 29,017,168 and 28,396,189 shares issued and outstanding at December 31, 2015		-			-
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at September 30, 2016 and December 31, 2015, and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015		-			-
Additional paid-in capital		127,213			122,844
Accumulated other comprehensive loss		(265	)		(502	)
Accumulated deficit		(79,558	)		(74,385	)
Treasury stock, at cost: 620,979 shares at September 30, 2016 and December 31, 2015		(2,601	)		(2,601	)
Total stockholders’ equity		44,789			45,356
Total liabilities and stockholders’ equity	$	78,511		$	70,917

Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2016			2015			2016			2015
	(unaudited)
Operating activities
Net loss	$	(1,637	)	$	(4,643	)	$	(5,173	)	$	(14,204	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization		1,093			673			2,617			1,800
Stock-based compensation expense		776			749			2,215			2,349
Other, net		179			26			218			(86	)
Changes in operating assets and liabilities:
Accounts and other receivables		(1,029	)		419			(2,023	)		(504	)
Prepaid expenses and other assets		(246	)		(488	)		217			(868	)
Accounts payable		429			223			(31	)		(329	)
Accrued liabilities		450			670			(700	)		53
Claims reserve		799			413			2,043			1,127
Deferred revenue		795			561			2,079			1,310
Other payables		(301	)		526			106			(416	)
Net cash provided by (used in) operating activities		1,308			(871	)		1,568			(9,768	)
Investing activities
Purchases of investment securities		(4,769	)		(5,016	)		(15,992	)		(16,082	)
Maturities of investment securities		3,239			3,313			12,577			13,580
Purchases of property and equipment		(456	)		(1,171	)		(1,546	)		(3,816	)
Equity method investment		-			(300	)		-			(300	)
Other		(61	)		-			(130	)		-
Net cash used in investing activities		(2,047	)		(3,174	)		(5,091	)		(6,618	)
Financing activities
Tax withholding on restricted stock		(662	)		(259	)		(662	)		(643	)
Proceeds from exercise of stock options		951			113			2,736			914
Proceeds from (repayment of) debt financing		3,002			-			3,988			(14,900	)
Payments on capital lease obligations		(37	)		-			(110	)		-
Net cash provided by (used in) financing activities		3,254			(146	)		5,952			(14,629	)
Effect of foreign exchange rates on cash, net		(96	)		(278	)		241			(395	)
Net change in cash and cash equivalents		2,419			(4,469	)		2,670			(31,410	)
Cash and cash equivalents at beginning of period		18,207			26,157			17,956			53,098
Cash and cash equivalents at end of period	$	20,626		$	21,688		$	20,626		$	21,688

The following tables set forth our key financial and operating metrics:

	Nine Months Ended
	September 30,
		2016			2015
Total pets enrolled (at period end)		334,070			276,988
Total subscription pets enrolled (at period end)		312,282			258,546
Monthly average revenue per pet	$	47.33		$	44.88
Lifetime value of a pet (LVP)	$	624		$	591
Average pet acquisition cost (PAC)	$	120		$	132
Average monthly retention		98.61	%		98.66	%
Adjusted EBITDA (in thousands)	$	(240	)	$	(9,711	)

	Three Months Ended
	Sep. 30, 2016			Jun. 30, 2016			Mar. 30, 2016			Dec. 31, 2015			Sept. 30, 2015			Jun. 30, 2015			Mar. 31, 2015			Dec. 31, 2014
Total pets enrolled (at period end)		334,070			320,896			307,298			291,818			276,988			259,948			246,106			232,450
Total subscription pets enrolled (at period end)		312,282			299,856			287,123			272,636			258,546			241,808			228,409			215,491
Monthly average revenue per pet	$	48.37		$	47.39		$	46.12		$	45.48		$	45.15		$	45.10		$	44.34		$	44.79
Lifetime value of a pet (LVP)	$	624		$	622		$	603		$	591		$	591		$	570		$	567		$	591
Average pet acquisition cost (PAC)	$	120		$	118		$	123		$	132		$	129		$	133		$	134		$	145
Average monthly retention		98.61	%		98.64	%		98.65	%		98.64	%		98.66	%		98.67	%		98.66	%		98.69	%
Adjusted EBITDA (in thousands)	$	304		$	522		$	(1,066	)	$	(1,588	)	$	(3,211	)	$	(3,165	)	$	(3,333	)	$	(2,903	)

The following table reflects the reconciliation of cash provided by (used in) operating activities to free cash flow (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2016			2015			2016			2015
Net cash provided by (used in) operating activities	$	1,308		$	(871	)	$	1,568		$	(9,768	)
Purchases of property and equipment		(456	)		(1,171	)		(1,546	)		(3,816	)
Free cash flow	$	852		$	(2,042	)	$	22		$	(13,584	)

The following table reflects the reconciliation of GAAP measures to non-GAAP measures (in thousands, except percentages):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Claims expense	$	34,253		$	26,604		$	97,323		$	75,442
Stock-based compensation expense		(74	)		(58	)		(189	)		(160	)
Cost of goods	$	34,179		$	26,546		$	97,134		$	75,282
% of revenue		70.7	%		70.1	%		71.0	%		70.5	%

Other cost of revenue	$	5,606		$	4,670		$	15,497		$	13,361
Stock-based compensation expense		(9	)		(10	)		(26	)		(35	)
Variable expenses	$	5,597		$	4,660		$	15,471		$	13,326
% of revenue		11.6	%		12.3	%		11.3	%		12.5	%

Subscription business gross profit	$	8,197		$	6,274		$	23,141		$	17,112
Stock-based compensation expense		83			68			215			195
Non-GAAP subscription business gross profit	$	8,280		$	6,342		$	23,356		$	17,307
% of subscription revenue		18.6	%		18.4	%		18.5	%		17.9	%

Gross profit	$	8,500		$	6,591		$	24,070		$	17,959
Stock-based compensation expense		83			68			215			195
Non-GAAP gross profit	$	8,583		$	6,659		$	24,285		$	18,154
% of revenue		17.7	%		17.6	%		17.7	%		17.0	%

General and administrative expense	$	3,811		$	4,067		$	11,028		$	11,760
Technology and development expense		2,339			3,005			6,790			8,683
Depreciation and amortization expense		(1,093	)		(673	)		(2,617	)		(1,800	)
Stock-based compensation expense		(521	)		(579	)		(1,581	)		(1,812	)
Fixed expenses	$	4,536		$	5,820		$	13,620		$	16,831
% of revenue		9.4	%		15.4	%		9.9	%		15.8	%

Sales and marketing expense	$	3,892		$	4,128		$	11,296		$	11,312
Stock-based compensation expense		(172	)		(102	)		(419	)		(342	)
Acquisition cost	$	3,720		$	4,026		$	10,877		$	10,970
% of revenue		7.7	%		10.6	%		7.9	%		10.3	%

The following tables reflect the reconciliation of acquisition cost and net acquisition cost to sales and marketing expense (in thousands):

	Nine Months Ended
	September 30,
		2016			2015
Sales and marketing expenses	$	11,296		$	11,312
Excluding:
Stock-based compensation expense		(419	)		(342	)
Acquisition cost		10,877			10,970
Net of:
Sign-up fee revenue		(1,547	)		(1,477	)
Other business segment sales and marketing expense		(156	)		(72	)
Net acquisition cost	$	9,174		$	9,421

	Three Months Ended
	Sep. 30, 2016			Jun. 30, 2016			Mar. 31, 2016			Dec. 31, 2015			Sept. 30, 2015			Jun. 30, 2015			Mar. 31, 2015			Dec. 31, 2014
Sales and marketing expenses	$	3,892		$	3,564		$	3,840		$	3,919		$	4,128		$	3,533		$	3,651		$	3,218
Excluding:
Stock-based compensation expense		(172	)		(165	)		(82	)		(104	)		(102	)		(110	)		(130	)		(147	)
Acquisition cost		3,720			3,399			3,758			3,815			4,026			3,423			3,521			3,071
Net of:
Sign-up fee revenue		(525	)		(495	)		(527	)		(506	)		(542	)		(451	)		(484	)		(363	)
Other business segment sales and marketing expense		(63	)		(55	)		(38	)		(8	)		(16	)		(30	)		(26	)		(30	)
Net acquisition cost	$	3,132		$	2,849		$	3,193		$	3,301		$	3,468		$	2,942		$	3,011		$	2,678

The following tables reflect the reconciliation of adjusted EBITDA to net loss (in thousands):

	Nine Months Ended
	September 30,
		2016			2015
Net loss	$	(5,173	)	$	(14,204	)
Excluding:
Stock-based compensation expense		2,215			2,349
Depreciation and amortization expense		2,617			1,800
Interest income		(78	)		(56	)
Interest expense		137			298
Income tax expense (benefit)		31			102
Loss (income) from equity method investment		11			-
Adjusted EBITDA	$	(240	)	$	(9,711	)

	Three Months Ended
	Sep. 30, 2016			Jun. 30, 2016			Mar. 31, 2016			Dec. 31, 2015			Sept. 30, 2015			Jun. 30, 2015			Mar. 31, 2015			Dec. 31, 2014
Net loss	$	(1,637	)	$	(964	)	$	(2,572	)	$	(3,001	)	$	(4,643	)	$	(4,625	)	$	(4,936	)	$	(4,276	)
Excluding:
Stock-based compensation expense		776			743			696			653			749			897			703			890
Depreciation and amortization expense		1,093			739			785			741			672			563			566			441
Interest income		(29	)		(26	)		(23	)		(19	)		(19	)		(18	)		(19	)		(18	)
Interest expense		66			41			30			26			14			40			245			103
Income tax expense (benefit)		13			4			14			12			16			(22	)		108			(43	)
Loss (income) from equity method investment		22			(15	)		4			-			-			-			-			-
Adjusted EBITDA	$	304		$	522		$	(1,066	)	$	(1,588	)	$	(3,211	)	$	(3,165	)	$	(3,333	)	$	(2,903	)

Contacts: 

Investors: 
Laura Bainbridge, Addo Investor Relations
310.829.5400
[email protected]

Trupanion Reports Third Quarter 2016 Results

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