Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Management has assessed the effectiveness of its internal control over financial reporting as of December 31, 2020 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this assessment, management concluded that, as of December 31, 2020, its internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Ernst & Young has independently assessed the effectiveness of the Company's internal control over financial reporting and its report is included below.
We completed the acquisition of Aquarium in October 2020. We have not yet fully incorporated the internal controls and procedures at Aquarium into our internal control over financial reporting, and as such, management excluded Aquarium from its assessment of the effectiveness of our internal control over financial reporting as of and for the year ended December 31, 2020. The acquired Aquarium business was immaterial to our consolidated financial statements, and constituted less than 10% of our total assets as of December 31, 2020 and less than 1% of our total revenue for the year ended December 31, 2020.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Trupanion, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Trupanion, Inc.’s internal control over financial reporting as of December 31, 2020 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Trupanion, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 , based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Aquarium Software Limited (Aquarium) which is included in the 2020 consolidated financial statements of the Company. Aquarium constituted less than 10% of the Company’s total assets as of December 31, 2020 and less than 1% of the Company’s total revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Aquarium.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019 , the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020 , and the related notes and the financial statement schedule listed in the Index at Item 15(a) and our report dated February 11, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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/s/ Ernst & Young LLP
Seattle, Washington
February 11, 2021
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 11. Executive Compensation
Information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report.
Item 14. Principal Accountant Fees and Services
Information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
We have filed the financial statements listed in the Index to Financial Statements as a part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
Schedule I Condensed Financial Information of Registrant
No other financial statement schedules have been provided because the information called for is not required or is shown either in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference.
Exhibit Incorporated by Reference Filed/Furnished
Number Exhibit Description Form File No. Exhibit Exhibit Filing Date Herewith
3.1
Restated Certificate of Incorporation of the Registrant.
10-Q 001-36537 3.1 8/28/2014
3.2
Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant.
8-K 001-36537 3.1 6/3/2016
3.3
Amended and Restated Bylaws of the Registrant.
X
4.1
Description of Capital Stock
10-K 001-36537 4.1 2/14/2020
4.2
Form of Common Stock Certificate.
S-1 333-196814 4.1 6/16/2014
10.1+
Form of Indemnity Agreement.
S-1 333-196814 10.1 6/16/2014
10.2+
2007 Equity Compensation Plan and forms of stock option agreements and exercise notices, restricted stock notice agreement and restricted stock agreement thereunder.
S-1 333-196814 10.2 6/16/2014
10.3+
2014 Equity Incentive Plan and forms of stock option award agreement, restricted stock agreement and restricted stock unit award agreement thereunder.
S-1 333-196814 10.3 6/16/2014
10.4+
2014 Employee Stock Purchase Plan.
S-1 333-196814 10.4 6/16/2014
10.5+
Consulting Agreement, dated May 5, 2014, by and between the Registrant and Howard Rubin.
S-1 333-196814 10.8 6/16/2014
10.6+
First Amendment to Consulting Agreement, dated January 1, 2016, by and between the Registrant and Howard Rubin.
10-Q 001-36537 10.2 5/6/2016
10.7+
Second Amendment to Consulting Agreement, dated January 1, 2017 by and between the Registrant and Howard Rubin.
10-K 001-36537 10.13 2/15/2017
10.8+
Third Amendment to Consulting Agreement, dated January 1, 2019 by and between the Registrant and Howard Rubin.
10-Q 001-36537 10.2 5/3/2019
10.9†
Agency Agreement between Omega General Insurance Company and Trupanion Brokers Ontario, Inc., effective January 1, 2015.
10-K 001-36537
10.13 2/24/2015
10.10†
Fronting and Administration Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2015.
10-K 001-36537 10.14 2/24/2015
10.11†
Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2015.
10-K 001-36537
10.15 2/24/2015
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10.12
Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2018.
10-K 001-36537 10.20 2/14/2018
10.13
Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2019.
10-K 001-36537 10.19 2/14/2019
10.14
Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2020.
10-K 001-36537 10.22 2/14/2020
10.15
Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective July 1, 2020.
10-K 001-36537 10.23 2/14/2020
10.16
Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2021.
X
10.17+
Compensation Program for Non-Employee Directors of Trupanion, Inc, as amended on January 29, 2021.
X
10.18+
Compensation Clawback Policy, effective February 11, 2019.
10-K 001-36537 10.21 2/14/2019
10.19+
Trupanion, Inc. Employee Severance and Change in Control Plan effective January 29, 2021.
8-K 001-36537 10.1 2/4/2021
10.20
Stock Purchase Agreement, dated as of October 26, 2020 by and between Trupanion, Inc. and Aflac Incorporated.
8-K 001-36537 10.1 10/29/2020
10.21
Strategic Alliance Agreement, dated as of October 26, 2020 by and between Trupanion, Inc. and Aflac Incorporated.
8-K 001-36537 10.2 10/29/2020
10.22
Shareholder Agreement, dated as of October 26, 2020 by and between Trupanion, Inc. and Aflac Incorporated.
8-K 001-36537 10.3 10/29/2020
21.1
Subsidiaries of the Registrant.
X
23.1
Consent of independent registered public accounting firm.
X
24.1
Power of Attorney (reference is made to the signature page hereto) .
X
31.1
Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1*
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2*
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
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101.INS XBRL Instance Document - the instance does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X
101.SCH Inline XBRL Taxonomy Extension Schema Document. X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X
104 Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) X
+ Indicates a management contract or compensatory plan or arrangement.
† Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment under Rule 24b-2 promulgated under the Exchange Act. The omitted portions of this exhibit have been filed separately with the SEC.
* This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Seattle, state of Washington, on this 11th day of February, 2021.
TRUPANION, INC.
By: /s/ Darryl Rawlings
Darryl Rawlings
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below hereby constitutes and appoints Darryl Rawlings, Tricia Plouf and Asher Bearman, and each of them, as his or her true and lawful attorneys-in-fact, proxies and agents, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, proxies and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, proxies and agents, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Date: February 11, 2020 /s/ Darryl Rawlings
Darryl Rawlings
Chief Executive Officer
(Principal Executive Officer)
Date: February 11, 2020 /s/ Tricia Plouf
Tricia Plouf
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 11, 2020 /s/ Murray Low
Murray Low
Chairman of the Board of Directors
Date: February 11, 2020 /s/ Jacqueline Davidson
Jacqueline Davidson
Director
Date: February 11, 2020 /s/ Michael Doak
Michael Doak
Director
Date: February 11, 2020 /s/ Robin Ferracone
Robin Ferracone
Director
Date: February 11, 2020 /s/ Eric Johnson
Eric Johnson
Director
Date: February 11, 2020 /s/ Dan Levitan
Dan Levitan
Director
Date: February 11, 2020 /s/ H. Hays Lindsley
H. Hays Lindsley
Director
Date: February 11, 2020 /s/ Howard Rubin
Howard Rubin
Director
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Schedule I - Condensed Financial Information of Registrant
Trupanion, Inc.
Condensed Statements of Operations and Comprehensive Loss
(Parent Company Only, in thousands)
Year Ended December 31,
2020 2019 2018
Expenses:
Veterinary invoice expense $ 1,118 $ 697 $ 571
Other cost of revenue 468 353 357
Technology and development 1,087 904 208
General and administrative 7,055 5,944 4,738
Sales and marketing 2,799 2,137 1,355
Depreciation and amortization 328 211 445
Total expenses 12,855 10,246 7,674
Gain (loss) from investment in joint venture ( 108 ) ( 205 ) —
Operating loss ( 12,963 ) ( 10,451 ) ( 7,674 )
Interest expense 1,361 1,327 1,184
Other (income) expense, net ( 4,845 ) ( 4,156 ) ( 2,557 )
Loss before equity in undistributed earnings of subsidiaries ( 9,479 ) ( 7,622 ) ( 6,301 )
Income tax benefit 8,460 5,423 4,042
Equity (loss) in undistributed earnings of subsidiaries ( 4,821 ) 390 1,332
Net loss $ ( 5,840 ) $ ( 1,809 ) $ ( 927 )
Other comprehensive income (loss), net of taxes:
Other comprehensive income (loss) of subsidiaries 2,821 1,003 ( 661 )
Other comprehensive income (loss) 2,821 1,003 ( 661 )
Comprehensive loss $ ( 3,019 ) $ ( 806 ) $ ( 1,588 )
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Trupanion, Inc.
Condensed Balance Sheets
( Parent Company Only)
(In thousands, except share data)
December 31,
2020 2019
Assets
Current assets:
Cash and cash equivalents $ 101,131 $ 1,242
Accounts and other receivables 3,983 2,933
Prepaid expenses and other assets 463 361
Total current assets 105,577 4,536
Restricted cash 6,319 1,400
Property and equipment, net 680 663
Intangible assets, net 5,478 5,356
Other long-term assets 14,378 14,146
Advances to and investments in subsidiaries 209,031 138,174
Total assets $ 341,463 $ 164,275
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, accrued liabilities, and other current liabilities $ 253 $ 311
Total current liabilities 253 311
Long-term debt — 26,086
Deferred tax liabilities 1,109 1,118
Other liabilities 162 —
Total liabilities 1,524 27,515
Stockholders’ equity:
Common stock: $0.00001 par value per share, 100,000,000 shares authorized at December 31, 2020 and December 31, 2019, 40,383,972 and 39,450,807 shares issued and outstanding at December 31, 2020; 35,876,882 and 34,947,017 shares issued and outstanding at December 31, 2019 — —
Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31, 2020 and December 31, 2019, and 0 shares issued and outstanding at December 31, 2020 and December 31, 2019 — —
Additional paid-in capital 439,007 232,731
Accumulated other comprehensive income (loss) 3,071 250
Accumulated deficit ( 91,360 ) ( 85,520 )
Treasury stock, at cost: 933,165 shares at December 31, 2020 and 929,865 shares at December 31, 2019 ( 10,779 ) ( 10,701 )
Total stockholders’ equity 339,939 136,760
Total liabilities and stockholders’ equity $ 341,463 $ 164,275
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Trupanion, Inc.
Condensed Statements of Cash Flows
(Parent Company Only, in thousands)
Year Ended December 31,
2020 2019 2018
Operating activities
Net loss $ ( 5,840 ) $ ( 1,809 ) $ ( 927 )
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
(Income) loss attributable to investments in subsidiaries 4,821 ( 390 ) ( 1,332 )
Depreciation and amortization 328 211 436
Stock-based compensation expense 8,912 6,846 4,775
Other, net 240 48 108
Changes in operating assets and liabilities ( 1,142 ) ( 601 ) ( 97 )
Net cash provided by (used in) operating activities 7,319 4,305 2,963
Investing activities
Cash paid in business acquisition, net of cash acquired ( 48,133 ) — —
Purchases of property and equipment ( 341 ) ( 728 ) ( 164 )
Advances to and investments in subsidiaries ( 24,885 ) ( 11,931 ) ( 67,884 )
Other investments — ( 7,019 ) ( 4,237 )
Net cash used in investing activities ( 73,359 ) ( 19,678 ) ( 72,285 )
Financing activities
Issuance of common stock, net of offering costs 192,265 — 65,671
Proceeds from exercise of stock options 6,013 2,982 3,601
Taxes paid related to net share settlement of equity awards ( 1,115 ) ( 1,667 ) ( 1,839 )
Proceeds from debt financing, net of financing fees 6,213 13,167 13,430
Repayments of debt financing ( 32,450 ) — ( 10,000 )
Other financing ( 78 ) — 287
Net cash provided by financing activities 170,848 14,482 71,150
Net change in cash, cash equivalents, and restricted cash 104,808 ( 891 ) 1,828
Cash, cash equivalents, and restricted cash at beginning of period 2,642 3,533 1,705
Cash, cash equivalents, and restricted cash at end of period $ 107,450 $ 2,642 $ 3,533
1. Organization and Presentation
The accompanying condensed financial statements present the financial position, results of operations and cash flows for Trupanion, Inc. These condensed unconsolidated financial statements should be read in conjunction with the consolidated financial statements of Trupanion, Inc. and its subsidiaries and the notes thereto (the Consolidated Financial Statements). Investments in subsidiaries are accounted for using the equity method of accounting. Trupanion, Inc. received cash dividends from a subsidiary of $ 4.7 million, $ 3.9 million and $ 2.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. These cash dividends were recorded within Trupanion, Inc.'s other income and were eliminated within the consolidated financial statements of Trupanion, Inc.
Additional information about Trupanion, Inc.’s accounting policies pertaining to intangible assets, commitments and contingencies, debt financing, stock-based compensation, stockholders’ equity, and income taxes are set forth in Notes 5, 9, 11, 12, 14, and 17, respectively, to the Consolidated Financial Statements.
97