TRUPANION, INC. 10-K

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, 2021 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, 2021, 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. 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 period covered by this Annual Report on Form 10-K 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. 88 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, 2021 , 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, 2021 , based on the COSO criteria. 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, 2021 and 2020 , 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, 2021 , and the related notes and the financial statement schedule listed in the Index at Item 15(a) and our report dated February 17, 2022 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. /s/ Ernst & Young LLP Seattle, Washington February 17, 2022 89 Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 90 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 2022 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 2022 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 2022 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 2022 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 2022 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. 91 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. 10-K 001-36537 3.3 2/12/2021 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 † 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. 6 † 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. 7 † 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 10. 8 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. 9 Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 2021. 10-K 001-36537 10.16 2/12/2021 10.1 0 Quota Share Reinsurance Agreement between Wyndham Insurance Company (SAC) Limited and Omega General Insurance Company, effective January 1, 202 2 . X 92 10.1 1 + Compensation Program for Non-Employee Directors of Trupanion, Inc, as amended on January 29, 2021. 10-K 001-36537 10.17 2/12/2021 10.1 2 + Compensation Clawback Policy, effective February 11, 2019. 10-K 001-36537 10.21 2/14/2019 10.1 3 + Trupanion, Inc. Employee Severance and Change in Control Plan effective January 29, 2021. 8-K 001-36537 10.1 2/4/2021 10. 14 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. 1 5 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. 1 6 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 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. 93 Item 16. Form 10-K Summary None. 94 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 17th day of February, 2022. 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, Gavin Friedman and Drew Wolff, 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. 95 Date: February 17, 2022 /s/ Darryl Rawlings Darryl Rawlings Chief Executive Officer (Principal Executive Officer) Date: February 17, 2022 /s/ Drew Wolff Drew Wolff Chief Financial Officer (Principal Financial and Accounting Officer) Date: February 17, 2022 /s/ Murray Low Murray Low Chairman of the Board of Directors Date: February 17, 2022 /s/ Jacqueline Davidson Jacqueline Davidson Director Date: February 17, 2022 /s/ Michael Doak Michael Doak Director Date: February 17, 2022 /s/ Eric Johnson Eric Johnson Director Date: February 17, 2022 /s/ Dan Levitan Dan Levitan Director Date: February 17, 2022 /s/ Howard Rubin Howard Rubin Director Date: February 17, 2022 /s/ Zay Satchu Zay Satchu Director 96 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, 2021 2020 2019 Expenses: Veterinary invoice expense $ 4,538 $ 1,118 $ 697 Other cost of revenue 2,610 468 353 Technology and development 3,130 1,087 904 General and administrative 11,714 7,055 5,944 New pet acquisition expense 9,177 2,799 2,137 Depreciation and amortization 473 328 211 Total expenses 31,642 12,855 10,246 Loss from investment in joint venture ( 33 ) ( 108 ) ( 205 ) Operating loss ( 31,675 ) ( 12,963 ) ( 10,451 ) Interest expense ( 2 ) 1,361 1,327 Other income, net ( 5,755 ) ( 4,845 ) ( 4,156 ) Loss before equity in undistributed earnings of subsidiaries ( 25,918 ) ( 9,479 ) ( 7,622 ) Income tax benefit 12,272 8,460 5,423 Equity (loss) in undistributed earnings of subsidiaries ( 21,884 ) ( 4,821 ) 390 Net loss $ ( 35,530 ) $ ( 5,840 ) $ ( 1,809 ) Other comprehensive income, net of taxes: Other comprehensive income of subsidiaries 6 2,821 1,003 Other comprehensive income 6 2,821 1,003 Comprehensive loss $ ( 35,524 ) $ ( 3,019 ) $ ( 806 ) 97 Trupanion, Inc. Condensed Balance Sheets ( Parent Company Only) (In thousands, except share data) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 33,957 $ 101,131 Accounts and other receivables 5,452 3,983 Prepaid expenses and other assets 591 463 Total current assets 40,000 105,577 Restricted cash 13,469 6,319 Property and equipment, net 904 680 Intangible assets, net 5,620 5,478 Other long-term assets 16,519 14,378 Advances to and investments in subsidiaries 257,197 209,031 Total assets $ 333,709 $ 341,463 Liabilities and stockholders’ equity Current liabilities: Accounts payable, accrued liabilities, and other current liabilities $ 254 $ 253 Total current liabilities 254 253 Deferred tax liabilities 1,094 1,109 Other liabilities 162 162 Total liabilities 1,510 1,524 Stockholders’ equity: Common stock: $0.00001 par value per share, 100,000,000 shares authorized; 41,408,350 and 40,475,185 shares issued and outstanding at December 31, 2021; 40,383,972 and 39,450,807 shares issued and outstanding at December 31, 2020 — — Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 466,792 439,007 Accumulated other comprehensive income (loss) 3,077 3,071 Accumulated deficit ( 126,890 ) ( 91,360 ) Treasury stock, at cost: 933,165 shares at December 31, 2021 and 2020 ( 10,779 ) ( 10,779 ) Total stockholders’ equity 332,200 339,939 Total liabilities and stockholders’ equity $ 333,710 $ 341,463 98 Trupanion, Inc. Condensed Statements of Cash Flows (Parent Company Only, in thousands) Year Ended December 31, 2021 2020 2019 Operating activities Net loss $ ( 35,530 ) $ ( 5,840 ) $ ( 1,809 ) Adjustments to reconcile net loss to cash provided by (used in) operating activities: (Income) loss attributable to investments in subsidiaries 17,501 170 ( 4,312 ) Depreciation and amortization 473 328 211 Stock-based compensation expense 28,226 8,912 6,846 Other, net ( 161 ) 240 48 Changes in operating assets and liabilities ( 1,219 ) ( 1,142 ) ( 601 ) Net cash provided by operating activities 9,290 2,668 383 Investing activities Cash paid in business acquisition, net of cash acquired — ( 48,133 ) — Purchases of property and equipment ( 280 ) ( 341 ) ( 728 ) Advances to and investments in subsidiaries ( 71,721 ) ( 24,885 ) ( 11,931 ) Dividends from subsidiaries 5,567 4,651 3,922 Other investments ( 1,755 ) — ( 7,019 ) Net cash used in investing activities ( 68,189 ) ( 68,708 ) ( 15,756 ) Financing activities Issuance of common stock, net of offering costs — 192,265 — Proceeds from exercise of stock options 3,607 6,013 2,982 Taxes paid related to net share settlement of equity awards ( 4,732 ) ( 1,115 ) ( 1,667 ) Proceeds from debt financing, net of financing fees — 6,213 13,167 Repayments of debt financing — ( 32,450 ) — Other financing — ( 78 ) — Net cash (used in) provided by financing activities ( 1,125 ) 170,848 14,482 Net change in cash, cash equivalents, and restricted cash ( 60,024 ) 104,808 ( 891 ) Cash, cash equivalents, and restricted cash at beginning of period 107,450 2,642 3,533 Cash, cash equivalents, and restricted cash at end of period $ 47,426 $ 107,450 $ 2,642 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 $ 5.6 million, $ 4.7 million and $ 3.9 million for the years ended December 31, 2021, 2020 and 2019, 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, stock-based compensation, stockholders’ equity, and income taxes are set forth in Notes 5, 9, 11, 13, and 16, respectively, to the Consolidated Financial Statements. 99