Trupanion(TRUP) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents unaudited condensed consolidated financial statements for Q2 and H1 2023, including Statements of Operations, Balance Sheets, and Cash Flows, with explanatory notes Note 8. Reserve for Veterinary Invoices This note details changes in the reserve for veterinary invoices, which increased by $4.6 million for the subscription business and $7.8 million for other business in H1 2023 - The reserve for veterinary invoices is an estimate of future payments for invoices dated on or before the balance sheet date, including internal processing costs, and is based on actuarial projections and management's assessment[50] Change in Reserve for Veterinary Invoices (Six Months Ended June 30, 2023, in thousands) | Segment | Beginning Reserve (Dec 31, 2022) | Ending Reserve (June 30, 2023) | Change | | :--- | :--- | :--- | :--- | | Subscription Business | $21,543 | $26,191 | +$4,648 | | Other Business | $22,191 | $30,011 | +$7,820 | Note 9. Debt The company's $150.0 million credit facility had $109.0 million outstanding at 10.39% interest as of June 30, 2023, with all covenants met - The company entered into a $150.0 million credit facility in March 2022, consisting of a $60.0 million initial term loan, $75.0 million in delayed draw term loans, and $15.0 million in revolving loans[56] - As of June 30, 2023, total outstanding borrowings were $109.0 million, with a stated interest rate of approximately 10.39%[57][60] Note 13. Segments The company operates two segments: subscription (64% of H1 2023 revenue) and other business, both reporting operating losses in H1 2023 - The company has two reporting segments: the subscription business (direct-to-consumer products) and the other business (underwriting for third parties and other solutions)[72] Segment Performance (Six Months Ended June 30, 2023 vs 2022, in thousands) | Segment | Revenue 2023 | Revenue 2022 | Operating Loss 2023 | Operating Loss 2022 | | :--- | :--- | :--- | :--- | :--- | | Subscription Business | $338,463 | $285,647 | $(31,585) | $(20,303) | | Other Business | $188,432 | $139,763 | $(5,847) | $(1,471) | | Total | $526,895 | $425,410 | $(37,576) | $(21,885) | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $270,566 | $219,411 | $526,895 | $425,410 | | Operating Loss | $(13,090) | $(12,771) | $(37,576) | $(21,885) | | Net Loss | $(13,714) | $(13,618) | $(38,494) | $(22,473) | | Net Loss Per Share (Basic and Diluted) | $(0.33) | $(0.33) | $(0.93) | $(0.55) | Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $520,595 | $469,096 | | Total Assets | $730,191 | $671,627 | | Total Current Liabilities | $330,658 | $289,616 | | Total Liabilities | $441,433 | $366,330 | | Total Stockholders' Equity | $288,758 | $305,297 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,267) | $(6,720) | | Net cash provided by (used in) investing activities | $28,385 | $(25,137) | | Net cash provided by financing activities | $33,717 | $46,771 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Q2 and H1 2023 financial results, highlighting 24% revenue growth driven by 25% increase in enrolled pets, alongside widening net losses due to higher expenses Key Operating Metrics Key operating metrics show total pets enrolled grew 25% to 1.68 million, PAC decreased to $241, and monthly retention slightly declined to 98.61% Key Operating Metrics Comparison | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Total pets enrolled (at period end) | 1,679,659 | 1,348,145 | | Total subscription pets enrolled (at period end) | 943,958 | 770,318 | | Monthly average revenue per pet | $64.00 | $64.24 | | Average pet acquisition cost (PAC) | $241 | $305 | | Average monthly retention | 98.61% | 98.74% | Results of Operations Q2 2023 total revenue increased 23% due to pet enrollment growth, but subscription cost of revenue rose to 87% due to higher veterinary expenses and G&A increased significantly from non-recurring costs - Total revenue for Q2 2023 increased by 23% YoY to $270.6 million, driven by a 19% increase in the subscription business and a 32% increase in the other business, primarily due to higher pet enrollment[121] - Subscription business cost of revenue as a percentage of its revenue increased from 84% to 87% YoY in Q2 2023. This was due to an 18% increase in underwritten policies and a 6% rise in veterinary invoice expense per pet, influenced by inflation and increased usage of direct-pay software[123] - General and administrative expenses for H1 2023 increased 84% YoY to $34.2 million, primarily due to a $5.7 million increase in stock-based compensation (including $4.8 million from executive departures) and a $3.8 million non-recurring settlement[128] - New pet acquisition expense decreased by 10% YoY in Q2 2023 to $20.8 million, reflecting a strategic focus on more efficient acquisition channels[129] Liquidity and Capital Resources The company holds $236.1 million in cash and equivalents, with $57.3 million excess capital in insurance subsidiaries, deemed sufficient for 12 months, despite increased net cash used in operations - As of June 30, 2023, the company had $236.1 million in cash, cash equivalents, and short-term investments, with an additional $40.0 million available under its Credit Facility[136] - The company's insurance subsidiaries held $213.1 million of capital surplus, which was $57.3 million above the estimated risk-based capital requirement of $155.8 million[136] - Net cash used in operating activities was $10.3 million for the six months ended June 30, 2023, an increase from $6.7 million in the same period of 2022, primarily due to higher veterinary invoice expenses[134][138] Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures have occurred in H1 2023 since the 2022 Form 10-K filing - There have been no material changes to the company's market risk disclosures since the fiscal year ended December 31, 2022[153] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[154] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[155] PART II - OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are currently deemed material - The company is subject to ordinary course litigation but does not believe any current matters are material[159] Risk Factors This section outlines key risks including a history of net losses, challenges in member growth and retention, reliance on contractors, potential for exceeding veterinary reserves, competition, and regulatory compliance - The company has a history of significant cumulative net losses, with a net loss of $44.7 million in 2022 and an accumulated deficit of $171.6 million as of December 31, 2022[162] - Business success is highly dependent on growing and retaining the member base, which involves uncertainties in pet acquisition spend, reliance on independent Territory Partners, and the ability to maintain high retention rates[161][170] - Actual veterinary invoice expenses may exceed established reserves, particularly with rising veterinary care costs, inflation, and increased claims from the use of its direct-pay software[185][188] - The business is heavily regulated by state, federal, and foreign laws, and failure to comply could result in significant penalties, fines, or license revocation[254][255] Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2023, the company issued 419 shares of common stock to a strategic distributor as part of an unregistered private placement - In Q2 2023, the company issued 419 shares of common stock to a strategic distributor as part of a marketing agreement. The sale was unregistered, relying on the private placement exemption[284] Other Information CEO Darryl Rawlings terminated his Rule 10b5-1 trading plan on May 23, 2023 - CEO Darryl Rawlings terminated his Rule 10b5-1 trading plan on May 23, 2023[287] Exhibits This section lists filed exhibits, including CEO/CFO certifications, an amended non-employee director compensation program, and a new severance and change in control plan - Filed exhibits include CEO and CFO certifications, an amended Compensation Program for Non-Employee Directors, and a new Severance and Change in Control Plan effective July 28, 2023[289]