Trupanion Reports Fourth Quarter and Full Year 2016 Results

Total revenue of $188.2 million in 2016, up 28% year-over-year

SEATTLE, Feb. 14, 2017 -- Trupanion, Inc. (Nasdaq:TRUP), a leading provider of medical insurance for cats and dogs, today announced financial results for the fourth quarter and full year ended December 31, 2016.

“I am pleased with our results in 2016, highlighted by consistent revenue growth and achieving positive free cash flow,” said Darryl Rawlings, CEO of Trupanion. “In 2017, we will continue our focus on optimizing our LVP to PAC by sub-category, testing initiatives to bolster same store sales, expanding the footprint of our direct pay initiative, investing in direct to consumer testing and exploring additional revenue opportunities within our other business segment.”

Full Year 2016 Financial and Business Highlights

Total revenue was $188.2 million, an increase of 28% compared to full year 2015.
Total enrolled pets (including pets from our other business segment) was 343,649 at December 31, 2016, up 18% over the prior year period.
Subscription business revenue was $173.4 million, an increase of 30% compared to the full year 2015.
Subscription pets enrolled was 323,233 at December 31, 2016, up 19% over the prior year period.
Net loss was $(6.9) million, compared to a net loss of $(17.2) million in the full year 2015.
Adjusted EBITDA was $0.1 million, compared to a loss of $(11.3) million in the full year 2015.
Positive operating cash flow of $5.0 million and free cash flow of $3.1 million in 2016, compared to negative operating cash flow of $10.4 million and negative free cash flow of $15.3 million in 2015.
As of December 31, 2016, there were 29.5 million basic shares outstanding and 33.0 million shares outstanding on a fully diluted basis.

Fourth Quarter 2016 Financial and Business Highlights

Total revenue was $51.3 million, an increase of 28% compared to the fourth quarter of 2015.
Subscription business revenue was $47.4 million, an increase of 29% compared to the fourth quarter of 2015.
Net loss was $(1.7) million, compared to a net loss of $(3.0) million in the fourth quarter of 2015.
Adjusted EBITDA was $0.3 million, compared to a loss of $(1.6) million in the fourth quarter of 2015.
Positive operating cash flow of $3.4 million and free cash flow of $3.0 million, compared to negative operating cash flow of $0.7 million and negative free cash flow of $1.7 million in the fourth quarter of 2015.
During the quarter, the Company increased and extended its credit facility. In the agreement, Bridge Bank, a division of Western Alliance Bank, joined existing lender Square 1 Bank, a division of Pacific Western Bank, in a newly created syndicate.

Revenue by Quarter

A chart accompanying this release is available at
http://www.globenewswire.com/NewsRoom/AttachmentNg/46d9a385-c00d-4dad-a51e-700bfad1a8f2

Conference Call
Trupanion’s management will host a conference call today to review its fourth quarter and full year 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: 13652718.

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. These reconciliations are included below and on Trupanion’s Investor 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						Years Ended
	December 31,						December 31,
	2016			2015			2016			2015
										(audited)
Revenue:
Subscription business	$	47,422		$	36,722		$	173,356		$	133,406
Other business		3,918			3,479			14,874			13,557
Total revenue		51,340			40,201			188,230			146,963
Cost of revenue:
Subscription business ⁽¹⁾		38,528			29,856			141,321			109,428
Other business		3,594			3,075			13,621			12,306
Total cost of revenue ⁽²⁾		42,122			32,931			154,942			121,734
Gross profit:
Subscription business		8,894			6,866			32,035			23,978
Other business		324			404			1,253			1,251
Total gross profit		9,218			7,270			33,288			25,229
Operating expenses:
Sales and marketing ⁽¹⁾		3,951			3,919			15,247			15,231
Technology and development ⁽¹⁾		2,744			2,533			9,534			11,215
General and administrative ⁽¹⁾		4,177			3,798			15,205			15,558
Total operating expenses		10,872			10,250			39,986			42,004
Operating loss		(1,654	)		(2,980	)		(6,698	)		(16,775	)
Interest expense		81			26			218			325
Other income, net		(19	)		(17	)		(58	)		(9	)
Loss before income taxes		(1,716	)		(2,989	)		(6,858	)		(17,091	)
Income tax expense		7			12			38			114
Net loss	$	(1,723	)	$	(3,001	)	$	(6,896	)	$	(17,205	)

Net loss per share:
Basic and diluted	$	(0.06	)	$	(0.11	)	$	(0.24	)	$	(0.62	)
Weighted-average shares used to compute net loss per share:
Basic and diluted		29,020,559			27,856,450			28,527,602			27,638,443

⁽¹⁾ Includes stock-based compensation expense as follows:
	Three Months Ended						Years Ended
	December 31,						December 31,
	2016			2015			2016			2015
Cost of revenue	$	60		$	68		$	275		$	263
Sales and marketing		113			104			532			446
Technology and development		88			93			246			404
General and administrative		470			388			1,893			1,889
Total stock-based compensation expense	$	731		$	653		$	2,946		$	3,002

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

	Three Months Ended						Years Ended
	December 31,						December 31,
	2016			2015			2016			2015
Claims expense	$	36,211		$	27,883		$	133,534		$	103,324
Other cost of revenue		5,911			5,048			21,408			18,410
Total cost of revenue	$	42,122		$	32,931		$	154,942		$	121,734

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

	Years Ended
	December 31,
		2016			2015
				(audited)
Assets
Current assets:
Cash and cash equivalents	$	23,637		$	17,956
Short-term investments		29,570			25,288
Accounts and other receivables		10,118			8,196
Prepaid expenses and other assets		2,062			2,193
Total current assets		65,387			53,633
Restricted cash		600			-
Long-term investments, at fair value		2,579			2,388
Equity method investment		271			300
Property and equipment, net		8,464			9,719
Intangible assets, net		4,910			4,854
Other long term assets		134			23
Total assets	$	82,345		$	70,917
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,006		$	1,289
Accrued liabilities		4,322			4,189
Claims reserve		9,521			6,274
Deferred revenue		13,463			11,042
Deferred tax liabilities		251			169
Other payables		1,094			654
Total current liabilities		30,657			23,617
Long-term debt		4,767			-
Deferred tax liabilities		1,372			1,433
Other liabilities		834			511
Total liabilities		37,630			25,561
Stockholders’ equity:
Common stock, $0.00001 par value per share, 100,000,000 shares authorized at December 31, 2016 and 200,000,000 shares authorized at December 31, 2015, 30,156,247 and 29,498,947 shares issued and outstanding at December 31, 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 December 31, 2016 and December 31, 2015, and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015		-			-
Additional paid-in capital		129,574			122,844
Accumulated other comprehensive loss		(377	)		(502	)
Accumulated deficit		(81,281	)		(74,385	)
Treasury stock, at cost: 657,300 shares at December 31, 2016, and 620,979 shares at December 31, 2015		(3,201	)		(2,601	)
Total stockholders’ equity		44,715			45,356
Total liabilities and stockholders’ equity	$	82,345		$	70,917

Trupanion, Inc.
Consolidated Statements of Cash Flows
(in thousands)

	Three Months Ended						Years Ended
	December 31,						December 31,
		2016			2015			2016			2015
										(audited)
Operating activities
Net loss	$	(1,723	)	$	(3,001	)	$	(6,896	)	$	(17,205	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization		1,229			741			3,846			2,542
Stock-based compensation expense		731			653			2,946			3,002
Other, net		(114	)		18			104			(68	)
Changes in operating assets and liabilities:
Accounts and other receivables		193			176			(1,830	)		(328	)
Prepaid expenses and other assets		(169	)		(37	)		48			(905	)
Accounts payable		683			(18	)		652			(347	)
Accrued liabilities		875			(2	)		175			51
Claims reserve		1,183			114			3,226			1,241
Deferred revenue		319			470			2,398			1,779
Other payables		231			228			337			(187	)
Net cash provided by (used in) operating activities		3,438			(658	)		5,006			(10,425	)
Investing activities
Purchases of investment securities		(15,624	)		(8,718	)		(31,616	)		(24,800	)
Maturities of investment securities		14,670			6,600			27,247			20,180
Purchases of property and equipment		(395	)		(1,077	)		(1,941	)		(4,894	)
Equity method investment		-			-			-			(300	)
Other		(68	)		(109	)		(198	)		(109	)
Net cash used in investing activities		(1,417	)		(3,304	)		(6,508	)		(9,923	)
Financing activities
Tax withholding on restricted stock		-			-			(662	)		(643	)
Proceeds from exercise of stock options		1,009			421			3,745			1,335
Proceeds from (repayment of) debt financing		1,000			-			4,988			(14,900	)
Payments on capital lease obligations		(94	)		-			(204	)		-
Other financing costs		(195	)		-			(195	)		-
Net cash provided by (used in) financing activities		1,720			421			7,672			(14,208	)
Effect of foreign exchange rates on cash, net		(130	)		(191	)		111			(586	)
Net change in cash, cash equivalents, and restricted cash		3,611			(3,732	)		6,281			(35,142	)
Cash, cash equivalents, and restricted cash at beginning of period		20,626			21,688			17,956			53,098
Cash, cash equivalents, and restricted cash at end of period	$	24,237		$	17,956		$	24,237		$	17,956

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

	Years Ended
	December 31,
		2016			2015
Total pets enrolled (at period end)		343,649			291,818
Total subscription pets enrolled (at period end)		323,233			272,636
Monthly average revenue per pet	$	47.82		$	45.04
Lifetime value of a pet (LVP)	$	631		$	591
Average pet acquisition cost (PAC)	$	123		$	132
Average monthly retention		98.60	%		98.64	%
Adjusted EBITDA (in thousands)	$	62		$	(11,297	)

	Three Months Ended
	Dec. 31, 2016			Sep. 30, 2016			Jun. 30, 2016			Mar. 31, 2016			Dec. 31, 2015			Sept. 30, 2015			Jun. 30, 2015			Mar. 31, 2015
Total pets enrolled (at period end)		343,649			334,070			320,896			307,298			291,818			276,988			259,948			246,106
Total subscription pets enrolled (at period end)		323,233			312,282			299,856			287,123			272,636			258,546			241,808			228,409
Monthly average revenue per pet	$	49.17		$	48.37		$	47.39		$	46.12		$	45.48		$	45.15		$	45.10		$	44.34
Lifetime value of a pet (LVP)	$	631		$	624		$	622		$	603		$	591		$	591		$	570		$	567
Average pet acquisition cost (PAC)	$	133		$	120		$	118		$	123		$	132		$	129		$	133		$	134
Average monthly retention		98.60	%		98.61	%		98.64	%		98.65	%		98.64	%		98.66	%		98.67	%		98.66	%
Adjusted EBITDA (in thousands)	$	302		$	304		$	522		$	(1,066	)	$	(1,588	)	$	(3,211	)	$	(3,165	)	$	(3,333	)

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

	Three Months Ended						Years Ended
	December 31,						December 31,
		2016			2015			2016			2015
Net cash provided by (used in) operating activities	$	3,438		$	(658	)	$	5,006		$	(10,425	)
Purchases of property and equipment		(395	)		(1,077	)		(1,941	)		(4,894	)
Free cash flow	$	3,043		$	(1,735	)	$	3,065		$	(15,319	)

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

	Three Months Ended December 31,						Years Ended December 31,
	2016			2015			2016			2015
Claims expense	$	36,211		$	27,883		$	133,534		$	103,324
Stock-based compensation expense		(45	)		(59	)		(234	)		(219	)
Cost of goods	$	36,166		$	27,824		$	133,300		$	103,105
% of revenue		70.4	%		69.2	%		70.8	%		70.2	%

Other cost of revenue	$	5,911		$	5,048		$	21,408		$	18,410
Stock-based compensation expense		(15	)		(9	)		(41	)		(44	)
Variable expenses	$	5,896		$	5,039		$	21,367		$	18,366
% of revenue		11.5	%		12.5	%		11.4	%		12.5	%

Subscription business gross profit	$	8,894		$	6,866		$	32,035		$	23,978
Stock-based compensation expense		60			68			275			263
Non-GAAP subscription business gross profit	$	8,954		$	6,934		$	32,310		$	24,241
% of subscription revenue		18.9	%		18.9	%		18.6	%		18.2	%

Gross profit	$	9,218		$	7,270		$	33,288		$	25,229
Stock-based compensation expense		60			68			275			263
Non-GAAP gross profit	$	9,278		$	7,338		$	33,563		$	25,492
% of revenue		18.1	%		18.3	%		17.8	%		17.3	%

General and administrative expense	$	4,177		$	3,798		$	15,205		$	15,558
Technology and development expense		2,744			2,533			9,534			11,215
Depreciation and amortization expense		(1,229	)		(741	)		(3,846	)		(2,542	)
Stock-based compensation expense		(558	)		(481	)		(2,139	)		(2,293	)
Fixed expenses	$	5,134		$	5,109		$	18,754		$	21,938
% of revenue		10.0	%		12.7	%		10.0	%		14.9	%

Sales and marketing expense	$	3,951		$	3,919		$	15,247		$	15,231
Stock-based compensation expense		(113	)		(104	)		(532	)		(446	)
Acquisition cost	$	3,838		$	3,815		$	14,715		$	14,785
% of revenue		7.5	%		9.5	%		7.8	%		10.1	%

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

	Years Ended
	December 31,
		2016			2015
Sales and marketing expenses	$	15,247		$	15,231
Excluding:
Stock-based compensation expense		(532	)		(446	)
Acquisition cost		14,715			14,785
Net of:
Sign-up fee revenue		(2,073	)		(1,983	)
Other business segment sales and marketing expense		(218	)		(80	)
Net acquisition cost	$	12,424		$	12,722

	Three Months Ended
	Dec. 31, 2016			Sep. 30, 2016			Jun. 30, 2016			Mar. 31, 2016			Dec. 31, 2015			Sept. 30, 2015			Jun. 30, 2015			Mar. 31, 2015
Sales and marketing expenses	$	3,951		$	3,892		$	3,564		$	3,840		$	3,919		$	4,128		$	3,533		$	3,651
Excluding:
Stock-based compensation expense		(113	)		(172	)		(165	)		(82	)		(104	)		(102	)		(110	)		(130	)
Acquisition cost		3,838			3,720			3,399			3,758			3,815			4,026			3,423			3,521
Net of:
Sign-up fee revenue		(526	)		(525	)		(495	)		(527	)		(506	)		(542	)		(451	)		(484	)
Other business segment sales and marketing expense		(62	)		(63	)		(55	)		(38	)		(8	)		(16	)		(30	)		(26	)
Net acquisition cost	$	3,250		$	3,132		$	2,849		$	3,193		$	3,301		$	3,468		$	2,942		$	3,011

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

	Years Ended
	December 31,
		2016			2015
Net loss	$	(6,896	)	$	(17,205	)
Excluding:
Stock-based compensation expense		2,946			3,002
Depreciation and amortization expense		3,846			2,542
Interest income		(119	)		(75	)
Interest expense		218			325
Income tax expense (benefit)		38			114
Loss (income) from equity method investment		29			-
Adjusted EBITDA	$	62		$	(11,297	)

	Three Months Ended
	Dec. 31, 2016			Sep. 30, 2016			Jun. 30, 2016			Mar. 31, 2016			Dec. 31, 2015			Sept. 30, 2015			Jun. 30, 2015			Mar. 31, 2015
Net loss	$	(1,723	)	$	(1,637	)	$	(964	)	$	(2,572	)	$	(3,001	)	$	(4,643	)	$	(4,625	)	$	(4,936	)
Excluding:
Stock-based compensation expense		731			776			743			696			653			749			897			703
Depreciation and amortization expense		1,229			1,093			739			785			741			672			563			566
Interest income		(41	)		(29	)		(26	)		(23	)		(19	)		(19	)		(18	)		(19	)
Interest expense		81			66			41			30			26			14			40			245
Income tax expense (benefit)		7			13			4			14			12			16			(22	)		108
Loss (income) from equity method investment		18			22			(15	)		4			-			-			-			-
Adjusted EBITDA	$	302		$	304		$	522		$	(1,066	)	$	(1,588	)	$	(3,211	)	$	(3,165	)	$	(3,333	)

Contacts: 

Investors: 
Tyler Drew, Addo Investor Relations
310.829.5400
[email protected]

Media:
Scott Janzen, Trupanion Director of Communications
888.612.1138 ext 3450
[email protected]

Trupanion Reports Fourth Quarter and Full Year 2016 Results

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