What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-02-23 compared with 2021-03-04 · 598 added, 505 removed, 753 unchanged (59% of the section changed)

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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

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Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)

Consolidated Statement s of Cash Flows

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

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In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB), and are required to be independent with respect to the Company in accordance with the U.S.

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.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Loss and Loss Adjustment Expense Reserves – Refer to Notes 2 and 5 to the financial statements

Critical Audit Matter Description

As of December 31, 2021, loss and loss adjustment expense reserves was $ 320.2 million.

The Company’s loss and loss adjustment expense reserves are determined by the Company using actuarial methods, models, assumptions, and judgment to estimate the reserves required to cover the amount required to settle insured losses as of the financial statement date.

Loss and loss adjustment expense reserves are inherently uncertain as to timing and amount and the recorded loss and loss adjustment expense reserves may vary materially from the actual ultimate cost of claims, particularly related to those reserves where there is a longer time span between the incidence of a loss and the settlement of a claim.

Given the subjectivity in estimating the ultimate loss and loss adjustment expense reserves, due to input variables such as historical and statistical information, inflation, contract interpretation, weather catastrophe impacts, regulatory environment, and economic conditions, among other factors, auditing loss and loss adjustment expense reserves, particularly related to those reserves over longer periods of time, involved an especially high degree of auditor judgment, including the need to involve our actuarial specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to loss and loss adjustment expense reserves included the following, among others:

• We tested the effectiveness of controls related to the reserve for loss and loss adjustment expense reserves, including those over the Company’s actuarial estimate.

• We tested the completeness and accuracy of the underlying key data inputs that served as the basis for the actuarial estimate.

• With the assistance of our actuarial specialists, we used the Company’s claims data to develop a range of independent estimates for the loss and loss adjustment expense reserves, particularly related to those over a longer period of time.

We used these independent estimates to assess the reasonableness of the Company’s reserves by comparing our estimates to the Company’s recorded loss and loss adjustment expense reserves.

• We compared the Company’s prior year estimates of expected loss and loss adjustment expense reserves to actual experience during the current year to identify potential bias in the determination of loss and loss adjustment expense reserves.

/s/ DELOITTE & TOUCHE LLP

Columbus, Ohio

March 4, 2021

February 23, 2022

We have served as the Company's auditor since 2017.

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Short-term investments (amortized cost:

$ 3.0 and $ 3.5 at December 31, 2020 and December 31, 2019, respectively)

zero and $ 3.0 at December 31, 2021 and December 31, 2020, respectively)

Other investments 4.7 0.5

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Premiums receivable, net of allowance of $ 5.4 and $ 3.5 at December 31, 2021 and December 31, 2020, respectively

Reinsurance recoverable 124.8 25.3

Reinsurance recoverable, net of allowance of $ 0.2 and zero at December 31, 2021 and December 31, 2020, respectively

Prepaid reinsurance premiums 100.8 112.8

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Total assets $ 1,319.3 $ 1,762.3

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity

Loss and loss adjustment expense reserves $ 320.2 $ 237.2

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Commitments and Contingencies (Note 12)

Redeemable convertible preferred stock, $ 0.0001 par value, zero and 158.9 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (liquidation preference of zero and $ 549.8 , respectively) (Note 10)

Stockholders’ equity (deficit):

Class A common stock, $ 0.0001 par value, 59.4 and zero shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (Note 10)

Redeemable convertible preferred stock, $ 0.0001 par value, 14.1 and zero shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively (liquidation preference of $ 126.5 and zero , respectively) (Note 10)

Stockholders’ equity:

Class A common stock, $ 0.0001 par value, 142.9 and 59.4 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively (Note 10)

Class B common stock, $ 0.0001 par value, 109.9 and 192.2 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively (Note 10)

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Accumulated loss ( 1,270.1 ) ( 748.0 )

Total stockholders’ equity (deficit) 1,032.4 ( 374.0 )

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 1,762.3 $ 728.6

Total stockholders’ equity 536.4 1,032.4

Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ 1,319.3 $ 1,762.3

See Notes to Consolidated Financial Statements

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Net realized gains on investments 2.4 0.3 —

Fee and other income 18.6 9.7 1.9

Total revenue 346.8 290.2 43.3

Fee income 20.9 17.4 9.7

Other income 6.8 1.2 —

Total revenues 345.4 346.8 290.2

Operating expenses:

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Sales and marketing 270.2 139.7 109.6

Other insurance (benefit) expense ( 1.8 ) 52.3 10.2

Other insurance expense (benefit) 5.0 ( 1.8 ) 52.3

Technology and development 65.5 52.9 24.0

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Total operating expenses 830.6 632.1 550.3

Operating loss ( 485.2 ) ( 285.3 ) ( 260.1 )

Interest expense ( 20.0 ) ( 77.7 ) ( 22.3 )

Loss on early extinguishment of debt ( 15.9 ) — —

Loss before income tax expense ( 521.1 ) ( 363.0 ) ( 282.4 )

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Net loss ( 521.1 ) ( 363.0 ) ( 282.4 )

Other comprehensive income:

Changes in net unrealized gains on investments 5.0 0.6 —

Other comprehensive (loss) income:

Changes in net unrealized (losses) gains on investments ( 5.2 ) 5.0 0.6

Comprehensive loss $ ( 526.3 ) $ ( 358.0 ) $ ( 281.8 )

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Weighted-average common shares outstanding:

basic and diluted 75.5 33.9 25.3

basic and diluted (both Class A and B) 249.2 75.5 33.9

See Notes to Consolidated Financial Statements

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FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019

Redeemable Convertible Preferred Stock Class A and Class B Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Loss Total Stockholders' Deficit

Redeemable Convertible Preferred Stock Class A and Class B Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Loss Total Stockholders' Equity (Deficit)

Shares Amount Class A Shares Class B Shares Amount Shares Amount

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Balance—January 1, 2019 136.4 $ 189.6 — 41.5 $ — 4.5 $ ( 0.1 ) $ — $ — $ ( 102.6 ) $ ( 102.7 )

Comprehensive loss:

Net loss — — — — — — — — — ( 282.4 ) ( 282.4 )

Common stock—option exercises — — — 5.8 — — — 0.1 — — 0.1

Reclassification of early-exercised stock option to liabilities — — — — — — — ( 0.2 ) — — ( 0.2 )

Common stock—shared-based compensation expense — — — — — — — 0.1 — — 0.1

Series C—preferred stock - voting issued, net of issuance costs 32.3 46.4 — — — — — — — — —

Series C—preferred stock - non-voting issued 3.1 4.5 — — — — — — — — —

Series D—preferred stock issued, net of issuance costs 19.3 99.9 — — — — — — — — —

Balance—December 31, 2018 136.4 $ 189.6 — 41.5 $ — 4.5 $ ( 0.1 ) $ — $ — $ ( 102.6 ) $ ( 102.7 )

Comprehensive loss:

Net loss — — — — — — — — — ( 282.4 ) ( 282.4 )

Changes in other comprehensive income — — — — — — — — 0.6 — 0.6

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Balance—December 31, 2019 158.9 $ 560.4 — 44.4 $ — 4.5 $ ( 0.1 ) $ 10.5 $ 0.6 $ ( 385.0 ) $ ( 374.0 )

Comprehensive loss:

Net loss — — — — — — — — — ( 363.0 ) ( 363.0 )

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Common stock—share-based compensation expense — — — — — — — 3.7 — — 3.7

Settlement of related party loan (Note 12) — — — ( 0.4 ) — 0.1 ( 0.7 ) 0.5 — — ( 0.2 )

Settlement of related party loan — — — ( 0.4 ) — 0.1 ( 0.7 ) 0.5 — — ( 0.2 )

Balance—December 31, 2020 — $ — 59.4 192.2 $ — 4.6 $ ( 0.8 ) $ 1,775.6 $ 5.6 $ ( 748.0 ) $ 1,032.4

Cumulative-effect of change in accounting principle (ASU 2016-13, see Note 2), net of tax — — — — — — — — — ( 1.0 ) ( 1.0 )

Balance at January 1, 2021 (as adjusted for change in accounting principle) — $ — 59.4 192.2 $ — 4.6 $ ( 0.8 ) $ 1,775.6 $ 5.6 $ ( 749.0 ) $ 1,031.4

Net loss — — — — — — — — — ( 521.1 ) ( 521.1 )

Changes in other comprehensive income — — — — — — — — ( 5.2 ) — ( 5.2 )

Conversion of Class B to Class A common stock — — 81.5 ( 81.5 ) — — — — — — —

Common stock—option exercises and restricted stock units vesting, net of shares withheld for employee taxes — — 2.4 0.5 — — — 4.4 — — 4.4

Reclassification of early-exercised stock option to liabilities — — ( 0.4 ) ( 1.3 ) — — — ( 0.2 ) — — ( 0.2 )

Common stock—share-based compensation expense — — — — — — — 19.3 — — 19.3

Warrant compensation expense — — — — — — — 8.8 — — 8.8

Retirement of treasury shares — — — — — ( 4.6 ) 0.8 ( 0.8 ) — — —

Preferred stock issued 14.1 126.5 — — — — — — — — —

Preferred stock and related warrants issuance costs — ( 14.5 ) — — — — — ( 1.0 ) — — ( 1.0 )

Balance—December 31, 2021 14.1 $ 112.0 142.9 109.9 $ — — $ — $ 1,806.1 $ 0.4 $ ( 1,270.1 ) $ 536.4

See Notes to Consolidated Financial Statements

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Share-based compensation 19.3 3.7 1.4

Warrant compensation expense 8.8 — —

Tender offer — 25.1 8.6

Depreciation and amortization, net 15.6 4.9 0.6

Depreciation and amortization 16.6 15.6 4.9

Bad debt expense 20.9 23.6 9.0

Loss on early extinguishment of debt 15.9 — —

SAFE fair value adjustment — — 11.2

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Paid-in-kind interest expense 10.6 9.1 0.8

Realized gains on investments ( 0.3 ) — —

Paid-in-kind interest paid ( 20.5 ) — —

Net realized gains on investments ( 2.4 ) ( 0.3 ) —

Change in fair value of equity securities ( 3.8 ) — —

Changes in operating assets and liabilities:

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Purchases of fixed assets ( 4.6 ) ( 1.8 ) ( 6.6 )

Net cash used in investing activities ( 114.1 ) ( 114.0 ) ( 20.6 )

Net cash provided by (used in) investing activities 76.9 ( 114.1 ) ( 114.0 )

Cash flows from financing activities:

Proceeds from exercise of stock options and restricted stock units, net of tax proceeds/(withholding)

Proceeds from issuance of common stock from IPO and concurrent private placements, net of issuance costs — 1,098.1 —

Proceeds from exercise of stock options and warrants 2.1 1.9 0.1

Proceeds from issuance of preferred stock, net of issuance costs — 349.6 150.8

Proceeds from debt and warrants issuance, net of issuance costs 12.0 189.5 —

Proceeds from issuance of preferred stock and related warrants 126.5 — 349.6

Payment of preferred stock and related warrants issuance costs ( 10.5 ) — —

Proceeds from issuance of debt and related warrants, net of issuance costs — 12.0 189.5

Repayments of long-term debt ( 199.5 ) ( 13.5 ) ( 15.5 )

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Purchases of treasury stock — ( 0.2 ) —

Net cash provided by financing activities 1,098.5 535.5 150.9

Net increase in cash, cash equivalents and restricted cash 697.2 294.3 104.2

Net cash (used in) provided by financing activities ( 80.3 ) 1,098.5 535.5

Net (decrease) increase in cash, cash equivalents and restricted cash ( 406.8 ) 697.2 294.3

Cash, cash equivalents and restricted cash at beginning of year 1,113.8 416.6 122.3

Cash, cash equivalents and restricted cash at end of year $ 707.0 $ 1,113.8 $ 416.6

Supplemental disclosures:

Interest paid $ 4.5 $ 4.3 $ 0.8

Federal income taxes paid — — —

Leasehold improvements - non-cash — 1.5 2.6

Conversion of debt to preferred stock - non-cash — 11.2 —

Conversion of preferred stock to common stock - non-cash 560.4 — —

Conversion of warrants to common stock - non-cash 75.0 — —

Purchases of treasury stock - non-cash 0.5 — —

See Notes to Consolidated Financial Statements

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NATURE OF BUSINESS

is a holding company which, directly or indirectly, maintains 100% ownership of each of its subsidiaries, including Root Insurance Company, an Ohio domiciled insurance company (together with Root, Inc.

“We,” “us” or “our”).

We were formed in 2015 and began writing personal auto insurance in July 2016.

We are a technology company operating a direct-to-consumer model with more than 75 % of our personal insurance customers acquired through mobile applications.

We offer auto and renters insurance products underwritten by Root Insurance Company.

As of December 31, 2020, we wrote auto policies in 30 states.

As of December 31, 2020, we wrote renters insurance in nine states and offered homeowners insurance in 18 states in partnership with Homesite.

is a holding company which, directly or indirectly, maintains 100 % ownership of each of its subsidiaries, including, among others, Root Insurance Company, an Ohio-domiciled insurance company;

Root Property & Casualty Insurance Company, a Delaware-domiciled insurance company;

and Root Reinsurance Company, Ltd., a Cayman Islands-domiciled reinsurance company;

together with Root, Inc.

“we,” “us” or “our.” We were formed in 2015 and began writing personal auto insurance in July 2016.

We are a technology company operating a primarily direct-to-consumer model with the majority of our personal insurance customers acquired through mobile applications.

We offer auto and renters insurance products underwritten by Root Insurance Company and Root Property & Casualty Insurance Company.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Actual results could differ from those estimates.

Significant estimates reflected in our consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, premium write-offs, intangible asset impairment and valuation allowance for income taxes.

COVID-19 —In December 2019, COVID-19 was first reported in Wuhan, China and in March 2020, the World Health Organization declared a global pandemic.

The global pandemic has severely impacted businesses worldwide, including within the insurance industry.

We have been impacted by certain individual state bulletins that outline COVID-19 premium relief efforts, including restrictions on the ability to cancel policies for non-payment, requirements to defer insurance premium payments for up to 60 days and restrictions on increasing policy premiums.

COVID-19 has impacted and may further impact the broader economic environment, including negatively impacting unemployment levels, economic growth, the proper functioning of financial and capital markets and interest rates.

As the COVID-19 pandemic continues to develop, there is uncertainty around the severity and duration of the pandemic and the pandemic’s potential impact on our business and our financial performance.

Deferred Offering Costs —Deferred offering costs, which primarily consist of legal, accounting, and other third-party fees directly related to our IPO and concurrent private placement, are capitalized as incurred.

Upon consummation of the IPO, these deferred offering costs were offset against the IPO and concurrent private placement proceeds.

Significant estimates reflected in our consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, or LAE, premium write-offs, fair value of warrants, intangible asset impairment and valuation allowance for income taxes.

COVID-19 —In March 2020, the World Health Organization declared COVID-19 to be a global pandemic.

The pandemic and related measures taken to contain the spread of COVID-19, such as government-mandated business closures, orders to “shelter in place” and travel and transportation restrictions, have negatively affected the U.S.

and global economies, disrupted global supply chains, and led to unemployment.

We, and other businesses within the insurance industry have been impacted by certain individual state bulletins that were issued in 2020 and outlined COVID-19-related premium relief efforts, including restrictions on the ability to cancel policies for non-payment, requirements to defer insurance premium payments for up to 60 days and restrictions on increasing policy premiums.

The COVID-19 pandemic and governmental responses thereto have impacted and may further impact the broader economic environment, including creating or exacerbating supply chain disruptions and inflation and negatively impacting unemployment levels, economic growth, the proper functioning of financial and capital markets and interest rates.

As a result of certain factors related to the COVID-19 global pandemic we continue to file in multiple states to establish rates that more closely follow the evolving loss cost trends.

As the COVID-19 pandemic continues, there is uncertainty around the severity and duration of the pandemic and the pandemic’s potential impact on our business and our financial performance.

Accordingly, we cannot predict the impact that it may have on our future results of operations and financial condition.

Debt and Equity Issuance Costs —Debt and equity issuance costs, which primarily consist of advisor, legal, accounting, and other third-party fees directly related to issuing debt and equity instruments, are capitalized as other assets in our consolidated balance sheets as incurred.

We incurred such costs in connection with our investment agreement we entered into with Carvana on August 21, 2021, or the Investment Agreement, and term loan agreement.

Upon close of the related transaction, these deferred issuance costs are generally offset against the related proceeds.

Debt issuance costs are subsequently amortized over the term of the financing agreement as interest expense on the consolidated statements of operations and comprehensive loss.

Asset Acquisition —In November 2020, we acquired all of the authorized, issued and outstanding shares of Catlin Indemnity Company, renamed Root Property & Casualty, for $ 22.8 million, which included cash, cash equivalents, and accrued investment income of $ 14.4 million and insurance license indefinite-lived intangible assets of $ 8.4 million.

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This acquisition will expand our ability to sell personal auto insurance in 48 states and the District of Columbia.

and a substantive process that together significantly contribute to the ability to create outputs and therefore does not meet the definition of a business under GAAP.

We accounted for the acquisition of Root Property & Casualty as an asset acquisition because substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets (the insurance licenses) and the acquisition of Root Property & Casualty did not include an input and a substantive process that together significantly contribute to the ability to create outputs and therefore does not meet the definition of a business under GAAP.

Accordingly, we recognized the acquired assets at fair value as of the acquisition date, with transaction costs allocated to the insurance license indefinite-lived intangible assets.

Indefinite-Lived Intangible Assets —In connection with the acquisition of Root Property & Casualty, we recognized insurance licenses of $ 8.9 million, including transaction cost, as of December 31, 2020 in other assets in our consolidated balance sheets.

Indefinite-Lived Intangible Assets —In connection with the acquisition of Root Property & Casualty, we recognized insurance licenses of $ 8.9 million, including transaction costs, as of December 31, 2021 and 2020 in other assets in our consolidated balance sheets.

We incur a minimal fee to renew each license.

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The evaluation requires the use of estimates and significant judgments and considers the weight of evidence and significance of all identified events and circumstances and most relevant drivers of fair value, both positive and negative, in determining whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount.

No impairment was recognized for 2021 or 2020.

Segment Information —Our chief operating decision maker is the Chief Executive Officer.

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We operate in one reporting segment providing direct-to-consumer insurance products to customers.

Statement of Cash Flows — The supplemental disclosures for cash and non-cash flows for the years ended December 31, 2021, 2020 and 2019 are as follows:

2021 2020 2019

(in millions)

Supplemental disclosures:

Interest paid $ 23.9 $ 4.5 $ 4.3

Federal income taxes paid — — —

Leasehold improvements - non-cash 1.5 — 1.5

Conversion of debt to preferred stock - non-cash — — 11.2

Conversion of preferred stock to common stock - non-cash — 560.4 —

Conversion of warrants to common stock - non-cash — 75.0 —

Lease liabilities arising from obtaining right-of-use asset

Investment Agreement issuance costs - non-cash 9.1 — —

Purchases of treasury stock - non-cash — 0.5 —

Cash, Cash Equivalents and Restricted Cash —Cash consists of cash on deposit.

Cash equivalents are short-term, highly liquid investments that mature within three months from the date of origination and are principally stated at amortized cost, which approximates their fair value.

Restricted cash consists of amounts held in escrow by a financial institution to collateralize a portion of outstanding debt.

Restricted cash consists of amounts held by a financial institution to satisfy letter of credit requirements for certain property leases.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount in the consolidated statements of cash flows:

(in millions)

Cash and cash equivalents $ 706.0 $ 1,112.8

Restricted cash 1.0 1.0

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

$ 707.0 $ 1,113.8

Book Overdraft —If checks are issued in excess of the amount of cash on hand, a book overdraft shall be reclassified to accounts payable on the consolidated balance sheets.

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Investments —Investments in debt securities are classified as short-term and available-for-sale securities and are carried at fair value with any unrealized gains and losses, net of taxes, recorded as a component of accumulated other comprehensive income.

Declines in the fair value of debt securities below their cost deemed to be other-than-temporary are reflected in operations as realized losses.

Management regularly reviews its securities for signs of other-than-temporary impairment, an assessment requiring significant management judgment.

Among the criteria management considers are the financial condition of the issuer, including receipt of scheduled principal and interest cash flows, length of time of unrealized loss, maturity dates, current economic conditions and intent to sell, including if it is more likely than not that we will be required to sell the security before recovery.

When a debt security has been determined to have an other-than-temporary impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized in earnings as a realized loss and the amount related to non-credit factors, which is recognized in other comprehensive income.

There were no other-than-temporary impairments recognized in 2020, 2019, or 2018.

Management regularly reviews our securities for signs of impairment, an assessment requiring significant management judgment.

Beginning with our adoption of Financial Accounting Standards Board, or FASB, Accounting Standard Update, or ASU, No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments as of January 1, 2021, the criteria that management considers are the financial condition of the issuer, including receipt of scheduled principal and interest cash flows, fair value of a security that has fallen below the amortized value, maturity dates, current economic conditions and intent to sell, including if it is more likely than not that we will be required to sell the security before recovery.

We then assess whether the decline in value is due to non-credit related or credit related factors.

Non-credit related declines in market value are recorded as unrealized losses in accumulated other comprehensive income.

If we determine that the decline is credit related, we establish an allowance for credit losses equal to the difference between the discounted cash flow model and the amortized value, which is recorded in net realized gains (losses) on investments in our consolidated statements of operations and comprehensive loss.

This allowance may be subsequently adjusted for recoveries or further credit losses.

Prior to January 1, 2021, we were under an incurred loss model whereby we reviewed our securities for signs of other than temporary impairment.

The criteria were similar to those noted above, except we also considered the length of time a security was in an unrealized loss position.

When a debt security was determined to have an other than temporary impairment, the impairment charge was separated into an amount representing the credit loss, which would be recognized in earnings as a realized loss and the amount related to non-credit factors, which would be recognized in other comprehensive income.

Subsequent recoveries of other than temporary impairment were not recognized.

No such credit losses were recognized in 2021, nor were there other than temporary impairments recognized in 2020 or 2019.

Other investments primarily consist of private equity investments without a readily determinable fair value.

We elected to account for these investments at cost minus any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer.

Such changes are accounted for within net investment income on our consolidated statements of operations and comprehensive loss.

We also invest in Low Income Housing Tax Credits, or LIHTC, projects by way of investing in a limited liability entity to offset Georgia premium taxes.

The purpose of these investments is to encourage private capital investments into regions within Georgia that are in need of economic development, while providing tax credits and operating loss tax benefits to investors.

We account for this investment using the cost method because our interest in the limited liability entity is so minor that we have virtually no influence over the entity’s operating and financial policies.

When we utilize the tax credits, the associated investment becomes impaired.

Impairment of the investment is recognized within net investment income in our consolidated statements of operations and comprehensive loss.

Fair Value Measurements —Fair value is defined as the price that would be received upon selling an asset or the price paid to transfer a liability on the measurement date in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants.

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Unearned premium is established to cover the unexpired portion of premiums written.

A premium deficiency, as measured on a direct basis, is recorded when the sum of expected losses, loss adjustment expenses, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium reserve and anticipated investment income.

A premium deficiency, as measured on a gross basis, is recorded when the sum of expected losses, LAE, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium reserve and anticipated investment income.

A premium deficiency reserve is recognized as a reduction of deferred acquisition costs and, if necessary, by accruing an additional liability for the deficiency, with a corresponding charge to operations.

We did not record a premium deficiency reserve in 2021, 2020 or 2019.

In August 2021, we commenced a fronting arrangement with an unaffiliated Texas county mutual insurance company, or the fronting carrier.

We route all of our new auto policies, and, over time, expect to route certain renewal auto policies, in Texas through the fronting carrier whereby we assume 100% of the related premium and losses on those policies.

The fronting arrangement allows us to have greater rating and underwriting flexibility.

Premiums assumed are deferred and earned pro rata over the policy period.

Unearned premium is established to cover the unexpired portion of premiums assumed.

Premiums receivable represents premiums written but not yet collected.

Generally, premiums are collected prior to providing risk coverage, minimizing our exposure to credit risk.

Due to a variety of factors, certain premiums billed may not be collected, for which we establish an allowance for doubtful accounts based on an analysis of historical collection experience.

Allowance for doubtful accounts was $ 3.5 million and $ 2.0 million as of December 31, 2020 and 2019 on the consolidated balance sheets.

Due to a variety of factors, certain premiums billed may not be collected, for which we establish an allowance for doubtful accounts based primarily on an analysis of historical collection experience, adjusted for current economic conditions.

Allowance for credit losses was $ 5.4 million and $ 3.5 million as of December 31, 2021 and 2020, respectively, on the consolidated balance sheets.

A policy is considered past due on the first day after its due date and policies greater than 90 days past due are written-off.

We recognized bad debt expense of $ 20.9 million, $ 23.6 million and $ 9.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Fee and Other Income —Fee income consists of the flat fee we charge to those policyholders who pay premiums on an installment basis.

Fee Income —Fee income consists of the flat fee we charge to those policyholders who pay premiums on an installment basis.

The fee relates to the additional administrative costs associated with processing more frequent billings.

We recognize this fee income in the period in which we process each installment.

Other income primarily comprises commissions earned for homeowners policies placed with third-party insurance companies where we have no exposure to the insured risk, recognized on the effective date of the associated policy, and sale of enterprise technology products to provide telematics-based data collection and trip tracking, recognized ratably as the service is performed.

Sales and Marketing —Sales and marketing includes spend related to performance and partnership channels, channel media, advertising, branding, public relations, consumer insights and referral fees.

These expenses also include related employee costs including salaries, health benefits, bonuses, employee retirement plan related expenses and share-based compensation expense, or Personnel Costs, and overhead allocated based on headcount, or Overhead.

We incur sales and marketing activities for all product offerings.

Other Income —Other income primarily comprises revenue earned from distributing website and app policy inquiry leads in geographies where we do not have a presence, recognized when we generate the lead;

commissions earned for homeowners policies placed with third-party insurance companies where we have no exposure to the insured risk, recognized on the effective date of the associated policy;

and sale of enterprise technology products to provide telematics-based data collection and trip tracking, recognized ratably as the service is performed.

Sales and Marketing —Sales and marketing expenses includes spend related to performance and embedded channels, channel media, advertising, branding, public relations, consumer insights and referral fees.

These expenses also include related employee costs including salaries, health benefits, bonuses, employee retirement plan related expenses and employee share-based compensation expense, or Personnel Costs, and overhead allocated based on

headcount, or Overhead.

It also includes warrant compensation expense related to our embedded channel.

We incur sales and marketing expenses for all product offerings.

Sales and marketing costs are expensed as incurred.

Other Insurance (Benefit) Expense —Other insurance (benefit) expense includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, and Personnel Costs and Overhead related to actuarial and certain data science activities.

Other insurance (benefit) expense also includes amortization of deferred acquisition costs like premium taxes and report costs related to the successful acquisition of a policy.

Other insurance (benefit) expense is expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned.

Other Insurance Expense (Benefit) —Other insurance expense (benefit) includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, and Personnel Costs and Overhead related to actuarial and certain data science activities.

Other insurance expense (benefit) also includes amortization of deferred acquisition costs like premium taxes and report costs related to the successful acquisition of a policy.

Other insurance expense (benefit) is expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned.

These expenses are also recognized net of ceding commissions earned from our quota share reinsurance agreements.

The ceding commission provides for reimbursement of both direct and other periodic acquisition costs, including certain underwriting and marketing costs, and is presented as a reduction of other insurance (benefit) expense.

Technology and development —Technology and development consists of software development costs related to our mobile app and homegrown information technology systems;

Technology and development —Technology and development expense consists of software development costs related to our mobile app and homegrown information technology systems;

third-party services related to infrastructure support;

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and amortization of internally developed software.

Technology and development is expensed as incurred, except for

development and testing costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life.

Technology and development is expensed as incurred, except for development and testing costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life.

General and Administrative —General and administrative expenses primarily relate to external professional service expenses;

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General and administrative expenses are expensed as incurred.

Policy Acquisition Costs —Acquisition costs, consisting of premium taxes and certain marketing costs and underwriting expenses, net of ceding commissions, related to the successful acquisition or renewal business, are deferred and amortized over the same period in which the related premiums are earned.

Policy Acquisition Costs —Acquisition costs consist primarily of premium taxes, certain marketing costs and underwriting expenses, and fronting carrier commissions, net of ceding commissions, related to the successful acquisition of new or renewal business.

They are deferred and amortized over the same period in which the related premiums are earned.

Ceding commissions relating to reinsurance agreements are recorded as a reimbursement for both deferrable and non-deferrable acquisition costs.

The portion of the ceding commission that is equal to the pro rata share of acquisition costs based on quota share percentage is recorded as an offset to the direct deferred acquisition costs.

The portion of the ceding commission that is equal to the pro rata share of acquisition costs based on quota share percentage is recorded as an offset to the gross deferred acquisition costs.

Any portion of the ceding commission that exceeds the acquisition costs of the business ceded is recorded as excess ceding commission, a deferred liability, and amortized over the same period in which the related premiums are earned.

We amortized deferred acquisition costs of $ 17.1 million, $ 12.2 million and $ 2.8 million for the years ended December 31, 2020, 2019 and 2018, respectively, which are recognized in other insurance (benefit) expense in our consolidated statements of operations and comprehensive loss.

Loss and Loss Adjustment Expense Reserves —Loss and loss adjustment expense (“LAE”) reserves include an amount determined using adjuster determined case-base estimates for reported claims and on actuarial unpaid claim estimates using past experience and historical emergence patterns for unreported losses and LAE.

These reserves are established to cover the estimated ultimate cost to settle insured losses.

The unpaid claim es timates consider loss cost trends, mix of business, and other risk factors impacting claims settlement.

The method used to estimate unpaid LAE reserves is based on claims transaction data, including the relative cost of settling the range of claim types from express material damage claims to more complex injury cases.

Deferred acquisition costs, net of accumulated amortization, was $ 2.8 million and $ 1.7 million as of December 31, 2021 and 2020, respectively.

We amortized deferred acquisition costs of $ 26.4 million, $ 17.1 million and $ 12.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Loss and Loss Adjustment Expense and Reserves —Loss and LAE reserves include an amount determined using adjuster determined case-base estimates for reported claims and actuarial determined unpaid claim estimates using past experience and historical emergence patterns for unreported losses and LAE.

These reserves are a liability established to cover the estimated ultimate cost to settle insured losses.

The estimation of the liability for loss and LAE reserves is complex and includes subjective considerations and management’s judgement.

The actuarial methods to determine unpaid loss es timates consider loss trends, contract interpretation, mix of business, regulatory environment, economic conditions, inflation and other risk factors impacting claims settlement.

The method used to estimate unpaid LAE liability is based on claims transaction data, including the relative cost of adjusting and settling a range of claim types from express material damage claims to more complex injury cases.

There is considerable uncertainty associated with the actuarial estimates, and therefore no assurance can be made that the ultimate unpaid claim liability will not vary materially from such estimates.

These loss estimates are continually reviewed by management and adjusted as necessary;

with adjustments included in the period determined and recorded in loss and LAE on our consolidated statements of operations and comprehensive loss.

These loss estimates are continually reviewed by management and adjusted as necessary, with adjustments included in the period determined and recorded in loss and LAE on our consolidated statements of operations and comprehensive loss.

As such, loss and LAE reserves represent management’s best estimate of the ultimate liability related to reported and unreported claims.

Our loss and LAE reserves are recorded gross of reinsurance and net of amounts expected to be received from salvage (the amount recovered from a total loss claims expense) and subrogation (the right to recover payments from third parties).

Reinsurance —In the ordinary course of business, we cede a portion of our business written to reinsurers to limit the maximum net loss potential arising from large risks and catastrophes.

Loss and LAE is recorded net of amounts ceded to reinsurers.

We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth.

These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying risks.

Loss and LAE may be paid out over a period of years.

Various other expenses incurred during claims processing are allocated to LAE.

These amounts include claims Personnel Costs, software expense, internally developed software amortization, and Overhead.

Reinsurance —In the ordinary course of business, we cede and retrocede a portion of our business written and assumed, respectively, to reinsurers to limit the maximum net loss potential arising from large risks and catastrophes.

These arrangements, known as treaties, provide for reinsurance coverage on quota-share and excess-of-loss basis.

All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance.

Although the ceding of reinsurance does not discharge us from our primary liability to the policyholder, the insurance company that assumes the coverage assumes the related liability.

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We obtain our reinsurance from a diverse group of reinsurers and monitor concentration as well as financial strength ratings of the reinsurers to minimize counterparty credit risk.

All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance.

To recognize this risk of credit loss, we have established an allowance for credit losses based on the probability of default and the expected loss given default as influenced by factors such as the reinsurer’s credit rating and average life of our reinsurance recoverables.

Allowance for credit losses was $ 0.2 million and zero as of December 31, 2021 and 2020, respectively.

Income Taxes —For the 2021 tax year, Root, Inc.

will file a consolidated federal income tax return with Caret Holdings, Inc., Root Insurance Company, Root Property & Casualty and Root Reinsurance Company, Ltd.

The consolidated return also includes Root Insurance Agency, LLC and Root Enterprise, LLC, which are disregarded entities under Root Inc.

will file a consolidated federal income tax return with Caret Holdings, Inc., Root Insurance Company, Root Property & Casualty, Root Lone Star Insurance Agency, Inc, and Root Reinsurance Company, Ltd.

The consolidated return also includes Root Insurance Agency, LLC, Root Enterprise, LLC and Root Scout, LLC, which are disregarded entities under Caret Holdings, Inc.

for federal income tax purposes.

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These costs are amortized on a straight-line basis over a five-year period.

Internally developed software costs are assessed for impairment at least quarterly to ensure assets are still in service.

Internally developed software costs are assessed for impairment at least quarterly, which also ensures that the assets are still in service.

If there are assets identified as no longer in use, the remaining unamortized costs will be fully amortized.

We amortized internally developed software of $ 2.4 million, $ 1.4 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively, recorded as technology and development expense in our consolidated statements of operations and comprehensive loss.

We amortized internally developed software of $ 3.7 million, $ 2.4 million and $ 1.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The capitalized cost and accumulated amortization of internally developed software at December 31, 2021 and 2020 are as follows:

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Depreciation on computers and furniture is recognized on a straight-line basis over a useful life of three years and five years , respectively.

Depreciation on leasehold improvements is recognized on a straight-line basis over the

shorter of their useful life or the life of the lease.

Depreciation on leasehold improvements is recognized on a straight-line basis over the shorter of their useful life or the life of the lease.

When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts.

For the years ended December 31, 2020, 2019 and 2018, depreciation expense was $ 3.1 million, $ 1.7 million and $ 0.3 million, respectively, in our consolidated statements of operations and comprehensive loss.

For the years ended December 31, 2021, 2020 and 2019, depreciation expense was $ 4.6 million, $ 3.1 million and $ 1.7 million, respectively.

The capitalized cost and accumulated depreciation of fixed assets at December 31, 2021 and 2020 are as follows:

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Fixed assets, net $ 10.3 $ 8.9

Share-Based Compensation —We award share-based compensation, including stock options with only a service condition, stock options with service and performance conditions, restricted stock units, or RSUs, and restricted stock, to our officers, directors, employees, and certain advisors through approval from the Compensation Committee of the Board of Directors.

Share-based compensation expense is recognized based on the grant date fair value of the awards.

The fair value of stock options is determined on the grant date using the Black-Scholes Merton, or BSM, option-pricing model.

Employee Share-Based Compensation —We award share-based compensation, including stock options with only a service condition, stock options with service and performance conditions, restricted stock units, or RSUs, and restricted stock, to our officers, directors, employees, and certain advisors through approval from the Compensation

Committee of the Board of Directors.

We have also granted warrants to purchase shares of the Company’s Class A common stock to Carvana, which vest based upon achievement of certain performance conditions.

Share-based compensation expense is recognized based on the grant date fair value of the awards, which is determined using the Black-Scholes Merton, or BSM, option-pricing model.

The BSM option pricing model requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the options, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield.

The fair value of restricted stock and RSUs granted before our IPO had historically been determined by our Board of Directors, with input from management, and considering third-party valuations of our common stock.

The fair value of common stock underlying the stock options, restricted stock and RSUs granted before our initial public offering, or IPO, had historically been determined by our Board of Directors, with input from management, and considering third-party valuations of our common stock.

Because there had been no public market for our common stock, our Board of Directors had determined its fair value at the time of grant of the pre-IPO option by considering a number of objective and subjective factors, including financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors.

Our Board of Directors determined the fair value of common stock based on valuations performed using the Option Pricing Method and the Probability Weighted Expected Return Method subject to relevant facts and circumstances.

After our IPO, our common stock is now listed on the Nasdaq and we use these market prices for the fair value of our common shares.

Stock options are exercisable for a period up to ten years from the grant date.

We recognize forfeitures as they occur.

In connection with our IPO, our common stock became listed on the Nasdaq Global Select Market and we use these market prices for the fair value of our common shares.

Stock options are generally exercisable for a period up to ten years from the grant date.

We recognize forfeitures as they occur, which generally results in the reversal of previously recognized expense for nonvested awards.

In the event of an involuntary termination that results in the cancellation of an award, the remaining unrecognized compensation cost for the entire award is recognized in the period of cancellation.

If the award is cancelled and concurrently replaced upon termination, it follows modification accounting, typically as a Type III improbable-to-probable modification whereby it is effectively treated as a forfeiture and new grant as of the date of termination.

Stock options with only a service condition generally vest over four years - 25 % cliff vests after one year and approximately 2 % vests each month over three years thereafter.

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If a performance condition is no longer probable of achievement, any previously recognized compensation expense is reversed and no subsequent compensation expense is recognized until achievement is once again probable, at which point a cumulative catch-up is recognized.

Restricted stocks units (RSUs) generally vest over four years - 25 % cliff vests after one year and approximately 2 % vests each month over three years thereafter.

Certain other RSUs vest over four years - 25 % cliff vests after one year and in equal increments quarterly over three years thereafter;

vest over four years in equal quarterly increments;

and fully cliff vest after one year .

RSUs generally vest over four years - 25 % cliff vests after one year and approximately 2 % vests each month over three years thereafter.

Certain other RSUs vest in accordance with one of the following patterns:

over four years - 25 % cliff vests after one year and in equal increments quarterly over three years thereafter, over four years in equal quarterly increments, or fully cliff vest after one year .

We generally recognize share-based compensation expense ratably over the respective vesting period.

Before our IPO, the fair value of common stock underlying the options had historically been determined by our board of directors, with input from management, and considering third-party valuations of our common stock.

Because there had been no public market for our common stock, our board of directors had determined its fair value at the time of grant of the pre-IPO option by considering a number of objective and subjective factors, including

financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors.

Our board of directors determined the fair value of common stock based on valuations performed using the Option Pricing Method and the Probability Weighted Expected Return Method subject to relevant facts and circumstances.

After our IPO, our common stock is now listed on the Nasdaq and we use these market prices for the fair value of our common shares.

Warrant Compensation —In October 2021, we closed the Investment Agreement with the Carvana Group, LLC, or Carvana, that included the issuance of 14.1 million shares of redeemable convertible preferred stock designated as the Series A Convertible Preferred Stock and the issuance of eight tranches of warrants to purchase shares of the Company’s Class A common stock.

As part of the investment agreement, we and Carvana also entered into a five-year commercial agreement whereby our auto insurance products will be embedded into Carvana’s online car buying platform, or Integrated Platform.

The commercial agreement provides for agent commissions payable to Carvana for policy origination and an enterprise total loss replacement vehicle solution.

The Carvana warrants compensation expense is recognized based on the grant date fair value of the award, which was determined using a Monte Carlo simulation in a risk-neutral framework, as contemplated in the Income Approach of valuation.

Specifically, future equity is simulated in each period assuming a Geometric Brownian Motion.

We considered the features of the warrants and the interdependency of exercise decisions between the Short-Term Warrants and the Long-Term Warrants in using the Monte Carlo simulation in order to determine the optimum exercise decision.

The optimum exercise decision was made by choosing the option which would give the highest aggregate expected value to the holder in each of the 100,000 simulated paths.

The payoff of each path is

then calculated based on the simulated equity and discounted back to time zero using the applicable risk-free rates.

The fair value of the warrants are then calculated as the average value from all simulation paths.

Employing a Monte Carlo simulation with Geometric Brownian Motion requires a range of inputs for each uncertain variable, and establishing linkage between the assumptions, if necessary.

Inputs and assumptions used in our analysis included our stock price at grant date, exercise prices, the term of the warrants, equity volatility, risk-free rate and dividend yield.

Additional considerations included a discount for lack of marketability resulting from Carvana’s five-year lock-up period.

These warrants vest as the parties’ develop an integrated automobile insurance solution for Carvana’s online car buying platform, or the Integrated Platform, and insurance sales through the Integrated Platform.

The associated compensation expense is dependent on our periodic assessment of the probability of the milestones being achieved.

If deemed probable, we recognize compensation expense on a pro-rata basis considering progress toward achieving the milestones.

In determining the classification as equity, we followed guidance issued within FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging.

For additional information refer to Note 11, “Share-Based Compensation.”

Net Loss Per Share —Net loss per share results are a key indicator of the overall performance relative to each share of our outstanding common stock.

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares vested and outstanding during the period.

Our warrants were included in the weighted-average number of common shares outstanding, until they were exercised, because they have an insignificant exercise price of $ 0.0001 per share and are therefore considered outstanding common shares for computation of basic EPS.

The calculation for Diluted net loss per share is similar to basic net loss per share discussed above except the conversion of dilutive securities is included in the denominator.

Net Loss Per Share —Net loss per share, or EPS, results are a key indicator of the overall performance relative to each share of our outstanding common stock.

Basic EPS share for both Class A and Class B common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares vested and outstanding during the period.

In addition to common shares outstanding, the computation of basic EPS includes instruments for which the holder is deemed to have the present rights to share in current period earnings (loss) with common stockholders.

Accordingly, the warrants issued in connection with our Term Loan B were included in the 2020 and 2019 weighted-average number of common shares outstanding because they had an insignificant exercise price of $ 0.0001 per share and were therefore considered outstanding common shares for computation of basic EPS.

Diluted EPS for both Class A and Class B common stock includes all the components of basic EPS, plus the dilutive effect of common stock equivalents, but excludes those common stock equivalents from the calculation of diluted EPS when the effect of inclusion, assessed individually, would be anti-dilutive.

Notable dilutive securities relevant to our operations are stock options, performance stock options, nonvested shares subject to repurchase, restricted stock units, warrants and redeemable convertible preferred stock.

We have operated at a loss from operations for the years ended December 31, 2020, 2019, and 2018.

Therefore, the conversion of potential shares from dilutive securities would increase the denominator of the earnings (loss) per share, or EPS, calculation and would create a lower loss per share.

This means that the potentially dilutive securities are considered antidilutive as they increase our EPS.

Due to these losses from operations, diluted EPS would be equal to basic EPS.

Earnings are allocated equally between each class of common stock because they are entitled to the same liquidation and dividend rights.

Adopted Accounting Pronouncement —In August 2018, the FASB issued Accounting Standards Update No.

2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement , to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.

We early adopted ASU 2018-15 on January 1, 2020.

The adoption of this standard did not have a material impact on our financial statements or notes to financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes.

The amendments in the update simplify the accounting for income taxes by, among other things, removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items like comprehensive income, and recognizing franchise tax that is partially based on income as an income-based tax.

We early adopted ASU 2019-12 on January 1, 2020.

The adoption of this standard did not have a material impact on our consolidated financial statements or notes to consolidated financial statements.

Upcoming Accounting Pronouncements —We currently qualify as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, whereby we have the option to adopt new or revised accounting guidance within the same time periods as private companies.

We have elected this option but may ultimately determine it is preferable to take advantage of early adoption provisions offered within the applicable guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) .

The main provision of ASU 2016-02 requires the recognition of right-of-use lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.

The guidance also requires disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.

The effective date of ASU 2016-02 is for annual reporting periods beginning after December 15, 2021, and interim reporting periods beginning after December 15, 2022.

We expect to elect the practical expedient which will allow us to not apply the amended lease accounting guidance to comparative periods that will be presented.

The majority of our lease spend relates to real estate with the remaining lease spend primarily related to minor equipment.

While we are finalizing the evaluation of the impact of this standard on our consolidated financial statements, we expect the adoption of this guidance will result in recognition of operating lease liabilities of approximately $ 16 million based on the present value of the remaining minimum lease commitments.

We anticipate recognizing a corresponding

right-of-use asset based on the operating lease liabilities adjusted for previously recognized deferred rent and a cease-use liability previously recognized under ASC 420, Exit or Disposal Cost Obligations .

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

We have operated at a loss for the years ended December 31, 2021, 2020 and 2019.

Therefore, the conversion of common stock equivalents would increase the denominator of the EPS calculation and create a lower loss per share.

Therefore, these common stock equivalents are considered antidilutive and diluted EPS is equal to basic EPS.

Losses are allocated equally between both classes of common stock because they are entitled to the same liquidation and dividend rights.

Recently Adopted Accounting Pronouncements and Registrant Filing Status —Prior to December 31, 2021, we qualified as an “emerging growth company,” or EGC, under the Jumpstart Our Business Startups Act of 2012, or JOBS Act.

We previously elected to adopt certain new or revised accounting guidance within the same time period as private companies as permitted by our status as an EGC.

We became a large accelerated filer on December 31, 2021, and lost our status as an EGC.

Accordingly, we will follow the adoption criteria of public companies for new accounting pronouncements beginning with this Annual Report on Form 10-K.

Prior to this Annual Report on Form 10-K, our financial statements did not reflect adoption of certain amended guidance that public companies generally may have been required to adopt, but we were not required to adopt based on our EGC status.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

ASU 2016-13 amends previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred.

The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses.

The effective date of ASU 2016-13 is for reporting periods beginning after December 15, 2022.

We are currently evaluating the impact of this ASU.

ASU 2016-13 amends previous guidance on the

impairment measurement of financial assets, including reinsurance recoverables, available-for-sale securities, and premium receivables, by requiring an entity to recognize an allowance for expected credit losses as a contra asset, rather than impairment as losses are incurred.

The amended guidance is intended to result in more timely recognition of expected credit losses and enhance the accounting and disclosure of credit losses on financial assets.

The ASU requires a cumulative-effect change to retained earnings (accumulated loss) in the period of adoption and prospective changes on previously recorded impairments, to the extent applicable.

As a result of losing EGC status as of December 31, 2021, and because ASU 2016-13 may only be adopted as of the beginning of a fiscal year, we adopted this ASU effective January 1, 2021 using a modified retrospective approach.

We recognized a $ 1.0 million cumulative effect transition adjustment to beginning accumulated loss relating to $ 0.8 million for current expected credit losses on our premiums receivable and $ 0.2 million for current expected credit losses on our reinsurance recoverables.

The adoption of the accounting guidance did not have a material impact on our available-for-sale securities.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) , or ASU 2016-02.

The main provision of ASU 2016-02 requires the recognition of right-of-use lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.

The guidance also requires disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of related cash flows.

We adopted ASU 2016-02 on January 1, 2021.

We elected various practical expedients which include:

not applying the amended lease accounting guidance to comparative periods;

including the carry forward of our leases without reassessing whether any contracts are leases or contain leases, lease classification and initial direct costs;

and excluding leases with a term of 12 months or less from lease liability and right-of-use asset recognition.

We did not elect the hindsight practical expedient.

Our lease agreements contain lease components and non-lease components, both of which we have elected to account for as a single lease component for our real estate asset class.

Operating lease expense for operating lease right-of-use assets is recognized on a straight-line basis over the lease term, which may include options to extend or terminate the lease when it is reasonably certain to do so and there is a significant economic incentive to exercise that option.

Upon adoption of ASU 2016-02, we recognized an operating lease liability of $ 16.2 million and corresponding right-of-use asset of $ 9.9 million, which includes the effect of $ 6.3 million from reclassifying previously recognized deferred rent and lease exit liabilities as an offset, in accordance with the transition guidance.

These lease assets and liabilities are recorded as other assets and other liabilities on the condensed consolidated balance sheets.

This transition adjustment was reflected as a non-cash transaction in our condensed consolidated statements of cash flows.

The transition did not have a material impact on our results of operations, liquidity or debt covenant compliance under our debt agreements during the year.

For additional information refer to Note 8, “Leases.”

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).

The main provisions of ASU 2020-06 removes certain bifurcation models for convertible debt instruments and convertible preferred stock.

Therefore, the embedded conversion feature no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging , or that do not result in substantial premiums accounted for as paid-in-capital.

The amendment also removes certain settlement criteria that were required to be met in order for a contract to qualify for the derivative scope exception and to be classified as equity.

In addition, the amendment expands disclosure requirements for convertible instruments and simplifies areas of the guidance for diluted earnings-per-share calculations that are impacted by the amendments.

We elected to early adopt this update on January 1, 2021 using the modified retrospective approach.

This adoption did not have a material impact on our consolidated financial statements.

The amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities at December 31, 2021 and 2020 are as follows:

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Amortized Cost Allowance for Expected Credit Losses (1)

Gross Unrealized Gains Gross Unrealized Losses Fair Value

(dollars in millions)

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Other debt obligations 3.5 — — — 3.5

Total fixed maturities 215.4 5.7 ( 0.1 ) 221.0

Short-term investments 3.0 — — 3.0

Total $ 129.5 $ — $ 1.2 $ ( 0.8 ) $ 129.9

_______________

(1) We adopted ASU 2016-13 and the related amendments as of January 1, 2021.

For additional information refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

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Total $ 218.4 $ 5.7 $ ( 0.1 ) $ 224.0

The following tables reflect the gross unrealized losses, fair value on bonds, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019:

Management reviewed the available-for-sale securities at each balance sheet date to consider whether it was necessary to recognize a credit loss as of December 31, 2021 or other-than-temporary impairment as of December 31, 2020 related to any of the above securities.

We do not intend on selling the investments and it is not more likely than not that we will be required to sell the security before recovery.

Management concluded that the available-for-sale securities’ unrealized losses were due to non-credit related factors and, therefore, there was no allowance for credit loss recognized for the year ended December 31, 2021 and no other-than-temporary impairments recognized for the year ended December 31, 2020.

Other Investments

As of December 31, 2021 and 2020, other investments related to our private equity investments were $ 4.7 million and $ 0.5 million, respectively.

We recognized $ 3.8 million of unrealized gains in 2021 resulting from observable price changes within net investment income in our consolidated statements of operations and comprehensive loss.

There were no realized gains or impairment losses recognized on these investments for the years ended December 31, 2021 and 2020.

The following tables reflect the gross unrealized losses and fair value of bonds, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2021 and 2020:

Less than 12 Months 12 Months or More Total

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Commercial mortgage-backed securities 8.7 ( 0.1 ) — — 8.7 ( 0.1 )

Other debt obligations 0.1 — — — 0.1 —

Total bonds $ 39.7 $ ( 0.4 ) $ 16.1 $ ( 0.4 ) $ 55.8 $ ( 0.8 )

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(dollars in millions)

Treasury securities and agencies $ 15.7 $ — $ — $ — $ — $ 15.7 $ —

Municipal securities 2.3 — — — 2.3 —

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Total bonds $ 29.6 $ ( 0.1 ) $ — $ — $ 29.6 $ ( 0.1 )

There were no other-than-temporary impairments recognized for the years ended December 31, 2020, 2019 or 2018, respectively.

The amortized cost and fair value of short-term investments and fixed maturity securities by contractual maturity at December 31, 2020 and 2019 are as follows:

Amortized Cost Fair Value Amortized Cost Fair Value

The following table reflects the gross and net realized gains and losses on short-term investments and fixed maturities that have been included in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2021, 2020 and 2019:

2021 2020 2019

(dollars in millions)

Realized gains on investments $ 2.5 $ 0.5 $ —

Realized losses on investments ( 0.1 ) ( 0.2 ) —

Net realized gains on investments $ 2.4 $ 0.3 $ —

The following table sets forth the amortized cost and fair value of short-term investments and fixed maturity securities by contractual maturity at December 31, 2021:

Amortized Cost Fair Value

(dollars in millions)

Due in one year or less $ 24.6 $ 24.5

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Total $ 129.5 $ 129.9

Net realized gains on investments was $ 0.3 million for the year ended December 31, 2020 and zero for years ended December 31, 2019 and 2018, respectively.

The following table sets forth the components of net investment income for the years ended December 31, 2021, 2020 and 2019:

3 unchanged sentences

Interest on deposits and cash equivalents 1.1 1.7 3.8

Other investments 3.8 — —

Total 7.3 5.9 5.6

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FAIR VALUE OF FINANCIAL INSTRUMENTS

The following tables provide information about our financial assets and liabilities measured and reported at fair value:

The following tables provide information about our financial assets measured and reported at fair value as of December 31, 2021 and 2020:

Level 1 Level 2 Level 3 Total

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Total fixed maturities 22.6 107.3 — 129.9

Short-term investments 2.2 0.8 — 3.0

Cash equivalents 127.0 — — 127.0

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$ 587.6 $ 204.8 $ — $ 792.4

Warrant liability $ — $ — $ 20.3 $ 20.3

Total Liabilities at fair value

$ — $ — $ 20.3 $ 20.3

We estimate the fair value of all our different classes of Level 2 fixed rate maturities and short-term investments by using quoted prices from a combination of an independent pricing vendor or broker/dealer, pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

In conjunction with the closing of a note purchase agreement, we issued warrants that were disaggregated from the long-term debt in order to appropriately determine their standalone fair value.

To calculate the fair value we utilized the BSM approach.

The significant inputs in calculating the fair value of the warrants were the current price from the most recently completed 409A, the current risk-free rate used by the United States Treasury, the expected

term and the volatility assumption.

As of December 31, 2019, the BSM calculation yielded a fair value of $ 7.2497 per share for each of the 2.8 million warrants for a standalone fair value of $ 20.3 million classified as long-term debt and warrants on the consolidated balance sheets.

Upon the completion of our IPO, the warrant to purchase shares of preferred stock was converted into a warrant to purchase shares of our common stock.

All warrants were exercised into shares of Class B common stock.

As a result, the warrant liability was remeasured immediately prior to the IPO and reclassified to additional paid in capital within stockholders' equity on our consolidated balance sheets.

During the year ended December 31, 2020 and 2019, we recognized an adjustment of $ 54.7 million and zero , respectively, to the fair value of the warrants within interest expense of our consolidated statements of operations and comprehensive loss.

Private Equity Investments Measured at Fair Value on a Non-Recurring Basis

Private equity investments that have been remeasured during the period due to an observable event or impairment are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold.

See Note 3, “Investments,” for further information on our private equity investments.

Fair Value of Long-Term Debt

The carrying amount of long-term debt is recorded at historical amounts.

The fair value of outstanding long-term debt is classified within Level 2 of the fair value hierarchy.

The fair value is based on a model referencing observable interest rates and spreads to project and discount cash flows to present value.

For the years ended December 31, 2020 and 2019 the carrying amounts and fair values of these financial instruments were as follows:

The fair value of outstanding long-term debt as of December 31, 2020 was classified within Level 2 of the fair value hierarchy.

The fair value was based on a model referencing observable interest rates and spreads to project and discount cash flows to present value.

There was no outstanding long-term debt as of December 31, 2021, see Note 7, “Long-term Debt,” for further information.

As of December 31, 2021 and 2020, the carrying amounts and fair values of these financial instruments were as follows:

Carrying amount as of December 31, 2021

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Gross loss and LAE reserves, December 31 $ 320.2 $ 237.2 $ 140.7

Incurred losses and LAE attributable to prior accident years was an increase of $ 20.9 million and $ 8.8 million during 2020 and 2019, respectively, and a decrease of $ 0.2 million during 2018.

The increase to held loss reserves of prior years in 2020 of approximately $ 20.9 million was primarily related to higher than estimated reported losses resulting from frequency and severity in excess of expectations for bodily injury claims as well as higher emergence of collision claims from accident years 2019 and prior, partially due to timing of reported claims.

Incurred losses and LAE attributable to prior accident years was a decrease of $ 13.6 million and an increase of $ 20.9 million and $ 8.8 million during 2021, 2020 and 2019, respectively.

The decrease to incurred losses for prior accident years in 2021 of approximately $ 13.6 million was primarily due to lower-than-expected reported losses on bodily injury claims, and higher than expected subrogation and salvage recoveries from accident year 2020 material damage claims.

The year ended December 31, 2020 also included development of incurred losses related to accident years 2019 and prior as a result of a change in estimate.

The adjustments recorded in the year ended

December 31, 2020 were necessary in order to effectuate management’s best estimate for determining the estimated ultimate cost of settling claims using our knowledge and experience about past and current events and developments.

The increase to held loss reserves of prior years in 2019 of approximately $ 8.8 million was primarily related to higher than estimated reported losses resulting from higher emergence on bodily injury, uninsured and under-insured bodily injury, and property damage coverages.

Reconciliation of incurred and paid losses by LAE development to gross loss and loss expense reserves are as follows:

(dollars in millions)

Losses—net of reinsurance $ 133.0 $ 106.6

LAE—net of reinsurance 24.6 15.2

Reinsurance recoverables on unpaid losses 79.6 18.9

Total loss and LAE reserves—gross of reinsurance $ 237.2 $ 140.7

The adjustments recorded in the year ended December 31, 2020 were necessary in order to effectuate management’s best estimate for determining the estimated ultimate cost of settling claims using our knowledge and experience about past and current events and developments.

The increase to incurred losses for prior accident years in 2020 of approximately $ 20.9 million was primarily due to higher than estimated reported losses for bodily injury claims, as well as higher loss emergence on collision claims from prior accident years due to a slower cycle time for reported claims.

The increase to incurred losses for prior accident years in 2019 of approximately $ 8.8 million was primarily due to higher than estimated reported losses from bodily injury, uninsured and under-insured bodily injury, and property damage coverages.

The following table shows incurred and paid losses and allocated loss adjustment expenses, or ALAE, development by accident year for private passenger auto in aggregate, cumulative claim frequency is defined as the number of reported claims at the claim level which includes reported claims that do not result in a liability:

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2019 (unaudited)

2020 (unaudited)

2021 IBNR Reported Claims (1)

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295.9 287.7 10.6 117,028

341.6 62.9 146,270

Total $ 983.8 $ 76.7 372,061

3 unchanged sentences

2019 (unaudited)

2020 (unaudited)

(dollars in millions)

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2018 20.6 44.6 48.1 48.1

2019 177.0 277.7 296.2

2020 182.0 238.5

Total $ 763.3

Loss and ALAE reserves—net of reinsurance $ 220.5

Unallocated LAE reserves 13.6

Ceded unpaid loss and LAE 79.6

Loss and LAE reserves—gross of reinsurance $ 237.2

_______________

(1) Reported by claim event.

The following table sets forth the reconciliation of the claims development tables to the balance sheet losses and ALAE reserves, with separate disclosure of unallocated LAE, or ULAE, and reinsurance recoverable on unpaid losses for the years ended December 31:

(dollars in millions)

Loss and ALAE reserves—net of reinsurance $ 220.5 $ 144.0

ULAE reserves—net of reinsurance 20.2 13.6

Reinsurance recoverables on unpaid losses 79.5 79.6

Total loss and LAE reserves—gross of reinsurance $ 320.2 $ 237.2

The following table sets forth the historical average annual percentage payout of incurred losses and ALAE (claims duration), net of reinsurance, as of December 31, 2021:

Year 1 2 3 4 5

Incremental Paid (1)

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(1) Supplemental information and unaudited .

The following table reflects amounts affecting the consolidated balance sheets and statements of operations and comprehensive loss for ceded reinsurance as of and for the years ended December 31:

The following table reflects amounts affecting the consolidated balance sheets and statements of operations and comprehensive loss for reinsurance as of and for the years ended December 31:

2021 2020 2019

(dollars in millions)

Loss & LAE reserves:

Loss and LAE reserves:

Direct $ 313.2 $ 237.2 $ 140.7

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Direct $ 170.6 $ 157.1 $ 145.4

Assumed 9.5 — —

Ceded ( 100.8 ) ( 112.8 ) ( 17.4 )

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$ 683.9 $ 557.6 $ 395.0

Assumed 10.9 — —

( 302.5 ) ( 194.8 ) ( 73.6 )

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If our reinsurance was cancelled at December 31, 2021 and 2020, the maximum amount of return ceded commissions due with the return of unearned premiums would have been $ 26.5 million and $ 27.2 million, respectively.

Our reinsurance recoverable on unpaid losses was $ 109.1 million and $ 26.7 million as of December 31, 2020 and 2019, respectively.

As of December 31, 2020 and 2019, we recorded a provision for sliding scale commission of $ 8.1 million and $ 9.3 million, respectively, in reinsurance premiums payable on the consolidated balance sheets.

Our reinsurance recoverable on unpaid losses gross of the provision for loss corridor, loss ratio caps and allowance for credit losses was $ 160.7 million and $ 109.1 million as of December 31, 2021 and 2020, respectively.

As of December 31, 2021 and 2020, we recorded a provision for sliding scale commission of zero and $ 8.1 million, respectively, in reinsurance premiums payable on the consolidated balance sheets.

As of December 31, 2021 and 2020, a provision for loss corridor of $ 80.4 million and $ 29.5 million, respectively, was recorded as a contra-asset in reinsurance recoverable on the consolidated balance sheets.

EMPLOYEE BENEFIT PLANS

Beginning May 1, 2018, we became employer of record providing employees with employer-related health and welfare plans, including a defined contributory retirement plan, to which we contribute a percentage of an employee's salary and is fully vested.

During 2020, 2019 and 2018, we contributed $ 2.6 million, $ 1.3 million and $ 0.5 million, respectively, to employee benefit 401(k) plans.

LONG-TERM DEBT

On April 17, 2019, we closed on a $ 65.0 million term loan, or Term Loan A, to a group of syndicated financial institutions including SunTrust Bank (now known as Truist Bank), Huntington National Bank, Silicon Valley Bank, or, collectively, the Lenders.

The maturity of Term Loan A is October 16, 2020.

Interest is paid monthly and is determined on a floating interest rate calculated on the 1-month LIBOR plus an applicable margin of 4 %.

On June 26, 2019, we finalized an incremental term loan joinder agreement of $ 35.0 million to upsize Term Loan A with an additional lender (Western Alliance Bank) to bring the total Term Loan A principal balance to $ 100 million.

On November 25, 2019, we entered into an amended and restated Term Loan A in conjunction with an additional closing on a note purchase agreement of $ 100.0 million, or Term Loan B, with Centerbridge Partners, L.P., a private equity investor, or collectively our term loans.

The maturity of Term Loan B is November 25, 2024.

Interest is determined on a floating interest rate calculated on the 3-month LIBOR plus an applicable margin of 7 %.

In the event LIBOR is no longer available to the market, we will enter into an amended agreement, in accordance with the current agreement's terms, to reflect the alternate rate of interest based on this successor rate.

We have the option to pay interest in-kind, or PIK, on Term Loan B until October 15, 2021.

PIK interest will be added to the principal balance every 3 months until the end of the PIK Period, and interest will subsequently be paid quarterly.

Through the year ended December 31, 2019, we have elected to PIK interest on Term Loan B.

As a part of closing of Term Loan B, we issued warrants to purchase 2.8 million shares of our common stock with a strike price of $ 0.0001 per share and an expiration date of November 25, 2026.

These warrants are classified as liabilities, within long-term debt on the consolidated balance sheets, because they may be settled with a variable number of our shares.

The nature of these variable warrants is such that the Term Loan B and warrants holder will earn a rate of return between 20 % to 30 %.

Accordingly, the warrants contract does not limit the number of shares that we could be required to issue.

The fair value of these warrants as of December 31, 2019 was $ 7.2499 per share.

Interest expense of $ 0.4 million related to the amortization of warrants discount was recognized during the year-ended December 31, 2019 on the consolidated statements of operations and comprehensive loss.

The debt discount associated with these warrants, net of accumulated amortization and issuance costs, as of December 31, 2019 is approximately $ 19.5 million presented as long-term debt and warrants on the consolidated balance sheets.

For further information about the exercise and conversion of these warrants and the impact on our consolidated statements of operations and comprehensive loss, see Note 4, “Fair Value of Financial Instruments.”

In connection with the amended and restated Term Loan A on November 25, 2019, Silicon Valley Bank exited the Term Loan A syndication and their $ 24.9 million of outstanding debt was reallocated to two of the existing holders of Term Loan A on a pro rata basis.

This required us to escrow $ 24.9 million of cash for a potential pay down of the corresponding debt.

The cash in escrow is reflected as restricted cash on the consolidated balance sheets as of December 31, 2020.

In February 2020, we amended Term Loan A to add a new financial institution (Goldman Sachs Lending Partners LLC) to the syndicate in the amount of $ 12.5 million.

Accordingly, $ 12.4 million of the $ 24.9 million escrowed funds was remitted to us and the other $ 12.5 million was remitted to the two aforementioned existing holders to pay down the pro rata portion of the reallocated Term Loan A.

In September 2020, we amended Term Loan A to add new financial institutions (Wells Fargo, Barclays, Morgan Stanley, Deutsche Bank and Citibank) to the syndicate in the amount of $ 13.5 million and extended the maturity of Term Loan A to October 15, 2021.

As a part of the amended Term Loan A, the syndicate committed, pro rata, to a new $ 100 million revolving loan.

Commitment fees accrue at 0.50 % per annum on the daily amount of unused revolver and is paid quarterly.

For any amounts drawn on the revolving loan, interest accrues and is paid consistent with Term Loan A.

In addition, there is a letter of credit fee of 4 % per annum on the average daily amount of issued letters of credit against the revolver and a 0.125 % per annum fronting fee based on the average daily amount of letter of credit exposure.

We have no letters of credit outstanding as of December 31, 2020.

In order to amend Term Loan A, we also amended Term Loan B as the terms are pari passu.

Notable changes to Term Loan B include removal of the pay-down requirement after the completion of our IPO, an interest rate increase of 3.5 % (to 3-month LIBOR plus an applicable margin of 10.5 %) starting March 2021, and elimination of payment-in-kind, or PIK, interest after October 15, 2021.

We currently pay interest pursuant to the terms of the loan agreements and have the option to PIK on Term Loan B until October 15, 2021.

PIK interest is added to the principal balance every 3 months until we no longer PIK interest, at which point interest is paid quarterly.

We have elected to PIK interest on Term Loan B from the original date of closing through December 31, 2020.

Deferred PIK interest was $ 9.1 million and $ 0.8 million as of December 31, 2020 and 2019.

The Term Loan A was a term loan with a group of syndicated financial institutions that matured on October 15, 2021.

Interest was paid monthly and was determined on a floating interest rate calculated on the one-month LIBOR plus an applicable margin of 4 %.

As a part of the amended the Term Loan A, the syndicate committed, pro rata, to a $ 100 million revolving loan, which also expired on October 15, 2021.

Commitment fees accrued at 0.50 % per annum on the daily amount of unused revolving loan and was paid quarterly.

For any amounts drawn on the revolving loan, interest accrued and was paid consistent with the Term Loan A.

In addition, there was a letter of credit fee of 4 % per annum on the average daily amount of issued letters of credit against the revolver and a 0.125 %

per annum fronting fee based on the average daily amount of letter of credit exposure.

Upon the maturity of Term Loan A, we repaid the outstanding Term Loan A principal balance of $ 98.8 million and accrued interest and fees of $ 0.2 million.

We had no letters of credit outstanding or amounts drawn against the revolving loan on the date of termination.

The Term Loan B was a note we issued to a private equity investor that had a maturity date of November 25, 2024.

We extinguished the Term Loan B on November 8, 2021.

Interest was determined on a floating interest rate calculated on the three-month LIBOR plus an applicable margin of 10.5 %.

We paid interest pursuant to the terms of the loan agreement and had the option to pay-in-kind, or PIK, on the Term Loan B until October 15, 2021.

PIK interest was added to the principal balance every three months until we no longer elected to PIK interest, at which point interest would be paid quarterly.

We had elected to PIK interest on the Term Loan B from the original date of closing through October 15, 2021.

As a part of the Term Loan B, we issued warrants to purchase 2.8 million shares of our common stock with a strike price of $ 0.0001 per share and an expiration date of November 25, 2026.

These warrants were classified as liabilities within long-term debt on the consolidated balance sheets because they could be settled with a variable number of our shares.

Upon the completion of our IPO in 2020, all warrants were exercised and shares of Class B common stock were issued.

As a result, the warrant liability was remeasured immediately prior to the IPO and reclassified to additional paid-in capital on our consolidated balance sheets.

During the year ended December 31, 2021 and 2020, we recognized an adjustment of zero and $ 54.7 million, respectively, to the fair value of the warrants within interest expense of our consolidated statements of operations and comprehensive loss.

On November 8, 2021, we extinguished the Term Loan B for $ 120.9 million, consisting of $ 100.0 million principal balance and $ 20.9 million of accrued interest, including PIK interest, and fees.

We also amortized the remaining unamortized discount and debt and warrant issuance costs, all of which resulted in a loss on early extinguishment of debt of $ 15.9 million that was recognized in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2021.

The following summarizes the carrying value of long-term debt and warrants as of December 31, 2021 and 2020:

2 unchanged sentences

Term Loan B — 100.0

Warrants — 20.3

Total — 199.5

1 unchanged sentence

Unamortized discount and debt and warrant issuance costs

( 21.5 ) ( 28.5 )

Total $ — $ 188.2

The required principal payments on long-term debt are as follows:

Years Ending Amount

On January 26, 2022, we entered into a $ 300.0 million term loan, including the issuance of warrants, which matures on January 27, 2027.

For further information, see Note 17, “Subsequent Events.”

We primarily have operating leases for offices that support our corporate, claims and customer service functions.

We determine if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether we obtain substantially all of the economic benefits from and have the ability to direct the use of the asset.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease right-of-use assets and corresponding operating lease liabilities are recognized upon the commencement date based primarily on the present value of lease payments over the lease term.

We use the implicit rate of the lease, if it is readily determinable, in determining the present value of lease payments.

generally do not provide an implicit rate.

Therefore, we use a collateralized incremental borrowing rate that incorporates information available at commencement date, including our company-specific interest rates from recent debt issuances, which we adjusted to obtain our company-specific interest rate risk.

We also leverage commercial mortgage-backed securities, or CMBS, rates, for transactions with similar values, origination dates, geographies and property types as the respective lease, which are adjusted using linear interpolation if the lease term falls between the published CMBS terms.

As of December 31, 2021, our leases had a weighted-average discount rate of 10.8 %.

Our leases have remaining lease terms from approximately one year up to approximately six years with a weighted-average remaining lease term of 4.4 years as of December 31, 2021.

As of December 31, 2021, we recognized an operating lease liability of $ 14.1 million and corresponding right-of-use asset of $ 5.1 million.

Operating lease liabilities are included in other liabilities and operating lease right-of-use assets are included in other assets in our consolidated balance sheets.

For the year ended December 31, 2021, we recognized operating lease costs of $ 5.0 million, inclusive of the Easton facility exit expense discussed below.

Variable lease expense and short-term lease expense recognized during the year ended December 31, 2021 were not material.

Moreover, we recognized operating cash flows paid for amounts included in the measurement of operating lease liabilities of $ 3.8 million.

We recently announced a new initiative that empowers employees to work where it works best on an individual level.

Based on resulting feedback, we started evaluating office space needs and closed our Easton facility in Columbus, Ohio.

Our Easton facility has no future economic benefit, so we determined the cease-use date occurred in December 2021.

Accordingly, we accelerated the amortization of the remaining right-of-use asset and recognized $ 2.0 million of lease expense within general and administrative expenses in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2021.

We also sublease certain office space, resulting in sublease income.

Sublease income and the related assets and cash flows are not material to our consolidated financial statements as of and for the year ended December 31, 2021.

Sublease income is recognized as a reduction to operating lease expense in our consolidated statements of operations and comprehensive loss.

Future lease payments as of December 31, 2021 were as follows:

Operating Leases

(dollars in millions)

Total $ 199.5

2027 and thereafter 1.6

Total future lease payments 17.6

imputed interest ( 3.5 )

Total lease liabilities $ 14.1

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 under the prior lease accounting guidance, the following table summarizes, by remaining maturity, future commitments related to operating leases and other arrangements as of December 31, 2020:

Operating Leases

(dollars in millions)

2026 and thereafter 3.1

Base rent and related rent expenses were $ 4.8 million and $ 2.4 million for the years ended December 31, 2020 and 2019, respectively.

We had no income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019:

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Share-based compensation ( 3.3 ) 0.6 5.0 ( 1.4 ) 1.7 ( 0.6 )

Nondeductible compensation 1.8 ( 0.3 ) — — — —

State net operating loss ( 4.9 ) 0.9 ( 3.1 ) 0.9 ( 2.2 ) 0.8

Other ( 0.9 ) 0.2 1.3 ( 0.4 ) 2.4 ( 0.9 )

10 unchanged sentences

Bad debt expense 1.2 0.8

Debt issuance costs and discount 0.5 0.7

Excess ceding commission 2.2 —

Deferred compensation 2.5 1.4

Stock compensation 5.4 0.5

Other 2.6 0.6

State net operating loss carryforward 10.2 5.3

Net operating loss carryforward 217.4 124.1

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Net deferred tax asset $ — $ —

The above amounts were calculated in accordance with ASC 740 “Income Taxes.” The application of ASC 740 requires a company to evaluate the recoverability of deferred tax assets and to establish a valuation allowance if necessary to reduce the carrying value of the deferred tax asset to an amount which is more likely than not to be realized.

The above amounts were calculated in accordance with ASC 740, Income Taxes .

The application of ASC 740 requires a company to evaluate the recoverability of deferred tax assets and to establish a valuation allowance if necessary to reduce the carrying value of the deferred tax asset to an amount which is more likely than not to be realized.

Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance.

12 unchanged sentences

We file a consolidated federal income tax return and certain state income tax returns.

Tax years subsequent to 2017 are still subject to U.S.

Tax years 2018 and forward are still subject to U.S.

federal examinations.

2 unchanged sentences

Capital Stock

In October 2020, our Board of Directors approved our amended and restated certificate of incorporation, which authorized additional shares bringing our total authorized shares to 1,000.0 million of Class A common stock, 269.0 million shares of Class B Common Stock and 100.0 million shares of Preferred Stock.

All classes of stock have a par value of $ 0.0001 per share.

As of December 31, 2020 the Company had 59.4 million shares of Class A Common Stock, 192.2 million shares of Class B Common Stock, and zero shares of preferred stock issued and outstanding.

In October 2021, we issued redeemable convertible preferred stock to Carvana pursuant to the Investment Agreement.

We received $ 126.5 million of gross proceeds from the issuance of 14.1 million shares of redeemable convertible preferred stock designated as the Series A Preferred Stock and issued Carvana eight tranches of warrants to purchase shares of the Company’s Class A common stock.

Further details on the warrants are discussed in Note 11, "Share-Based Compensation." In connection with the Investment Agreement, we incurred issuance costs of $ 19.6 million, $ 9.0 million of which are contingent upon the success of the Investment Agreement as measured by achievement of certain warrant vesting milestones.

We allocated the issuance costs between the preferred stock and the warrants based on their relative fair values.

The warrants are recognized on a pro-rata basis considering Carvana’s progress toward achieving the milestones, and the allocated issuance costs are reclassified from other assets to contra-equity on that same pro-rata basis.

As of December 31, 2021, issuance costs were recognized in our consolidated balance sheets as follows:

$ 14.5 million as contra-redeemable convertible preferred stock;

$ 1.0 million as contra-additional paid-in capital;

and $ 4.1 million as other assets.

The carrying value of our preferred stock was $ 112.0 million as of December 31, 2021.

In October 2021, our Board of Directors approved the retirement of 4.6 million shares of Class A common stock that were held in treasury at $ 0.8 million.

In October 2020, we completed our IPO, which resulted in the issuance and sale of 24.2 million shares of Class A common stock at the IPO price of $ 27.00 .

2 unchanged sentences

All shares of our common stock and redeemable convertible preferred stock outstanding immediately prior to our IPO were converted into shares of our Class B common stock, and all warrants were exercised into shares of Class B common stock.

After completion of the IPO, 16.7 million shares of Class B common stock were converted to Class A common stock.

Other rights, privileges, and preferences of our common stock are as follows:

In October 2020, our Board of Directors approved our amended and restated certificate of incorporation, which authorized additional shares bringing our total authorized shares to 1,000.0 million of Class A common stock, 269.0 million shares of Class B common stock and 100.0 million shares of preferred stock.

All classes of stock have a par value of $ 0.0001 per share.

As of December 31, 2021, the Company had issued and outstanding:

142.9 million shares of Class A common stock, 109.9 million shares of Class B common stock, and 14.1 million shares of preferred stock that had a redemption value of $ 126.5 million.

The voting, dividend and liquidation rights of the holders of our Class A and Class B common stock are subject to and qualified by the rights, powers, and preferences of the holders of the preferred stock.

Other rights, privileges, and preferences of our capital stock are as follows:

Dividends —Class A and Class B common stock are entitled to the same dividend rights.

We shall not declare, pay, or set aside any dividends on shares of any other class or series of capital stock unless the holders of the preferred stock then outstanding shall first receive, or simultaneously receive, a dividend.

Beginning after the fifth anniversary of the Integrated Platform becoming available to customers, Series A Preferred Stockholders are entitled to receive, when, as and if declared by the Board of Directors, a dividend at an annual rate of 5 % of the liquidation preference per share of Series A Preferred Stock, if our 90-day volume-weighted average price, or VWAP, per share of Class A common stock is below the conversion price at that time.

Voting Rights —Our Class B common stock has ten votes per share and our Class A common stock has one vote per share.

In October 2020, the Board of Directors increased the size of the board to eleven and filled the resulting four vacancies by the affirmative vote of a majority of our shareholders.

Effective October 27, 2020, the Board of Directors assigned members already in office to one of three classes — Class I, Class II or Class III.

At the first, second and third annual meetings of stockholders following such initial classification, the initial terms of the Class I, Class II and Class III directors, respectively, expire and such directors are elected for a full term of three years.

At each succeeding annual meeting of stockholders, directors are elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.

Liquidation Preferences —In the event of any liquidation, dissolution, or winding up of our business, whether voluntary or involuntary, the holders of Class A and Class B common stock are entitled to the proceeds that shall be distributed to the common stockholders on a pro-rata basis.

Holders of preferred stock are entitled to vote, together with the holders of Class A common stock and Class B common stock, on an as-converted basis on all matters submitted to a vote of the holders of Class A common stock and Class B common stock.

Liquidation Preferences —In the event of any voluntary or involuntary liquidation, dissolution, or winding up of our business, after payment or provision for payment of the debts and other liabilities of the Company, the holders of Series A Preferred Stock are entitled to receive, before any distribution out of the assets of the Company may be made to or set aside for the holders of any common stock, an amount per share equal to the greater of (i) $ 9.00 per share plus the amount of any accrued but unpaid dividends thereon as of such date and (ii) the amount such preferred stockholders would have received had they, immediately prior to such an event, converted such shares of Series A Preferred Stock into Class A common stock.

Thereafter, holders of Class A and Class B common stock are entitled to any remaining proceeds on a pro-rata basis.

Class A and Class B common stock are entitled to the same liquidation rights.

1 unchanged sentence

Future transfers by holders of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers effected for tax or estate planning purposes.

Undesignated Preferred Stock —Shares of preferred stock may be issued from time to time in one or more series.

The Board of Directors may determine, in whole or in part, the number, preferences, limitations or relative rights of any such series before the issuance of any shares of that series.

As of December 31, 2019, our certificate of incorporation, as amended and restated, authorized 266.0 million of voting common stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.4 million Series C voting preferred shares, 19.6 million of Series D preferred voting stock and 30.1 million of Series E preferred voting stock.

All classes of stock have a par value of $ 0.0001 per share.

The voting, dividend, and liquidation rights of the holders of the common stock are subject to and qualified by the rights, powers, and preferences of the holders of the preferred stock.

The redeemable convertible preferred stock was recorded in mezzanine equity because while it is not mandatorily redeemable, it becomes redeemable at the option of the preferred stockholders upon the occurrence of a deemed liquidation event that is considered not solely within our control.

On September 20, 2019, 21.2 million Series E preferred shares were issued (as part of the “Series E Transaction”) to investors at a price per share of $ 16.4906 for a total cash contribution of $ 350.0 million.

Additionally, the Series E transaction was considered a qualifying event for the Simple Agreement for Future Equity ("SAFE") that was originally entered into with an outside investor in June 2019 for a total cash contribution of $ 10.0 million.

The SAFE was recorded as a liability prior to the Series E transaction.

In accordance with the terms of the agreement, the SAFE converted into 1.3 million Series E preferred shares at a conversion price of $ 7.7842 per share.

As of December 31, 2019, we recognized $ 11.2 million in interest expense in the consolidated statements of operations and comprehensive loss due to the change in fair value between the issuance date and the conversion date of the SAFE.

As part of the Series E transaction, our certificate of incorporation was amended, authorizing 266.0 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.4 million Series C voting preferred shares, 19.6 million of Series D preferred voting stock and 30.1 million of Series E preferred voting stock.

All classes of stock have a par value of $ 0.0001 per share.

On January 2, 2019 a holder of 1.3 million Series C non-voting preferred shares converted its shares to Series C voting preferred shares.

On December 19, 2018, a holder of 1.8 million Series C non-voting preferred shares converted its shares to C voting preferred shares.

On November 1, 2018, 19.3 million Series D voting preferred shares were issued (as part of the “Series D Transaction”) to both inside and outside investors at a price per share of $ 5.17071 for a total cash contribution of $ 100.0 million.

As part of the Series D transaction, our certificate of incorporation was amended, authorizing 240 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.4 million Series C voting preferred shares, and 3.1 million Series C non-voting preferred shares.

All classes of stock have a par value of $ 0.0001 per share.

On June 19, 2018, a 10-for-1 stock split was approved by our Board of Directors for our common and preferred stock.

As part of the stock split, our certificate of incorporation was amended, authorizing 180.0 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.8 million Series C voting preferred shares, and 3.2 million Series C non-voting preferred shares.

All classes of stock have a par value of $ 0.0001 per share.

On March 16, 2018, 32.3 million Series C voting preferred shares and 3.1 million Series C non-voting preferred shares were purchased (as part of the “Series C Transaction”) by both inside and outside investors at a price per share of $ 1.44206 for a total cash contribution of $ 51.0 million.

Series C non-voting preferred shares may be converted at any time to voting preferred shares by the holder of the non-voting shares.

As part of the Series C Transaction, our certificate of incorporation was amended, authorizing 180.0 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.8 million Series C preferred voting stock and 3.2 million Series C preferred non-voting stock.

All classes of stock have a par value of $ 0.0001 per share.

The following table displays our capital stock as of December 31, 2019:

Shares Authorized Shares Issued and Outstanding Carrying Value Redemption Value Common Stock Issuable Upon Conversion Conversion Price Per Share Redeemable on or After

Common Stock-Voting (1)

266.0 44.4 $ — —

Preferred Stock (1)

Preferred-Series A Redeemable Convertible (2)

40.5 40.0 5.1 $ 5.0 40.0 0.03 - 0.29

September 6, 2026

Preferred-Series B Redeemable Convertible

41.8 41.7 33.7 33.8 41.7 0.81 September 6, 2026

Preferred-Series C Redeemable Convertible - Voting

35.4 35.4 50.9 51.0 35.4 1.44 September 6, 2026

Preferred-Series D Redeemable Convertible

19.6 19.3 99.9 100.0 19.3 5.17 September 6, 2026

Preferred-Series E Redeemable Convertible (3)

30.1 22.5 370.8 360.0 22.5 7.78 - 16.49

September 6, 2026

Total Preferred Stock

167.4 158.9 $ 560.4 $ 549.8 158.9

_______________

(1) All classes of stock have a par value of $ 0.0001 per share

(2) Shares issued for Series A-1 had a conversion price of $ 0.03 .

Shares issued for Series A-2 had a conversion price of $ 0.11 .

Shares issued for Series A-3 had a conversion price of $ 0.29 .

Collectively these shares are referred to as Series A.

(3) Shares issued for Series E had a conversion price of $ 16.49 .

Shares issued for Series E-1 had a conversion price of $ 7.78 .

Collectively these shares are referred to as Series E.

Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time, or from time to time, into shares of Class A common stock at a conversion rate equal to the liquidation preference divided by the conversion price.

As of December 31, 2021, the conversion price was $ 9.00 per share and the Series A Preferred Stock was convertible into 14.1 million shares of Class A common stock.

To the extent that such conversion would cause the holder to hold in excess of 9.9 % of the voting stock, such conversion would be subject to approval from (a) the Delaware Insurance Commissioner and (b) the Ohio Director of Insurance.

Redemption and Balance Sheet Classification —The redeemable convertible preferred stock is classified as mezzanine equity because while it is not mandatorily redeemable, it will become convertible or redeemable at the option of the preferred stockholder in connection with any change of control of the Company, which is considered not solely within our control.

SHARE-BASED COMPENSATION

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We maintain an equity incentive plan, the 2020 Equity Incentive Plan, or the 2020 Plan, for the issuance and grant of equity awards (restricted stock, RSUs, and incentive and nonqualified stock options) to our officers, directors, employees and certain advisors.

As of December 31, 2020, the number of shares initially authorized under the 2020 Plan was 41.2 million Class A common shares, inclusive of available shares previously reserved for issuance under the 2015 Plan and subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised.

In addition, this reserve will automatically increase on January 1 of each year, commencing on January 1, 2021 and ending on (and including) January 1, 2030, in an amount equal to 4 % of the total number of shares of capital stock outstanding on December 31 of the preceding year;

however, the Board may act prior to January 1 of a given year to provide that the increase for such year will be a lesser number of shares of Class A common shares.

As of December 31, 2021, the number of shares authorized under the 2020 Plan was 53.8 million Class A common shares, inclusive of available shares previously reserved for issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, and subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised.

In addition, this reserve will automatically increase on January 1 of each year, which commenced on January 1, 2021 and will end on (and including) January 1, 2030, in an amount equal to 4 % of the total number of shares of capital stock outstanding on December 31st of the preceding year.

However, the Board may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of Class A common shares.

The aggregate maximum number of shares of Class A common stock that may be issued pursuant to the exercise of incentive stock options is 120.0 million shares.

As of December 31, 2021, the number of shares available for issuance under the 2020 Plan was 21.9 million.

In October 2020, our board of directors adopted and our stockholders approved the 2020 Employee Stock Purchase Plan (the “ESPP”), which became effective immediately prior to our IPO date.

In October 2020, our Board of Directors adopted and our stockholders approved the 2020 Employee Stock Purchase Plan, or ESPP, which became effective immediately prior to our IPO date.

The number of shares of Class A common stock initially reserved for issuance under the ESPP is limited to 5.0 million shares.

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2015 Equity Incentive Plan

In 2015, the board of directors of the Company adopted the 2015 Equity Incentive Plan, or the 2015 Plan, under which the Company may grant equity awards (restricted stock, and incentive and nonqualified stock options) to its

officers, directors, employees and certain advisors.

In 2015, the Board of Directors of the Company adopted the 2015 Plan under which the Company could grant equity awards (restricted stock, and incentive and nonqualified stock options) to its officers, directors, employees and certain advisors.

In October 2020, this plan was superseded by the 2020 Plan and all reserved shares under the 2015 Plan were transferred to the 2020 Plan.

The following table displays share-based compensation expense recorded in the consolidated statements of operations and comprehensive loss:

As part of the Investment Agreement discussed in Note 10, “Capital Stock,” we issued Carvana eight tranches of warrants, comprised of three tranches of “short-term warrants” and five tranches of “long-term warrants.” However, the exercisability of certain tranches are subject to Carvana’s decision to exercise certain other tranches.

If Carvana exercises short-term tranches, then long-term tranche 1 warrants are cancelled and the remaining long-term tranches would be reduced such that Carvana will have the opportunity to purchase a maximum of 129.1 million shares of Class A common stock.

As of December 31, 2021, we determined that all short-term warrants were probable of vesting.

Under that scenario, it is not a possible outcome for the long-term warrants to also vest, so they are considered not probable of vesting.

We recognized $ 8.8 million of warrant compensation expense related to these equity-classified warrants based on progress toward completing the Integrated Platform.

This expense is included in sales and marketing of our consolidated statements of operations and comprehensive loss.

All of these warrants are out-of-the-money and therefore have no intrinsic value as of December 31, 2021.

The short-term warrants will expire three years following the earlier of the date of completion of the Integrated Platform and 18 months following closing of the Investment Agreement, such earlier date, the Reference Date, and the long-term warrants will expire five years after the Reference Date.

The following table provides other key terms of the warrants:

Warrants Exercise Price Shares Issued

(in millions) Grant Date Fair Value per Share Vesting Condition

Tranche 1 $ 10.00 42.6 $ 0.42 Completing the Integrated Platform

Tranche 2 $ 11.00 57.8 $ 0.37 50,000 policy originations

Tranche 3 $ 12.00 28.7 $ 0.18 75,000 policy originations

Total Short-Term 129.1

Tranche 1 $ 10.00 25.8 $ 0.42 100,000 policy originations

Tranche 2 $ 12.50 26.9 $ 0.35 200,000 policy originations

Tranche 3 $ 15.00 27.1 $ 0.24 300,000 policy originations

Tranche 4 $ 22.50 26.1 $ 0.09 400,000 policy originations

Tranche 5 $ 30.00 23.2 $ 0.04 500,000 policy originations

Total Long-Term 129.1

The fair value of the warrants is estimated on the date of grant using a Monte Carlo simulation with Geometric Brownian Motion that uses certain inputs, assumptions and estimates, as follows:

expected term of five years , based on the contractual term of the warrants;

risk-free interest rate of 0.9 %, based on U.S.

Constant Maturity Yield Curve over a similar term;

dividend rate of 0.0 %, based on our historical and expected future dividend payouts, which may be subject to change in the future;

and volatility of 45 %, based on historical and implied volatility of comparable

publicly held companies, because we did not have sufficient company-specific volatility at the time of grant, and other factors.

Employee Share-Based Compensation

The following table displays employee share-based compensation expense recorded in the consolidated statements of operations and comprehensive loss:

Years Ended December 31,

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Sales and marketing 1.0 1.0 —

Other insurance (benefit) expense 1.0 — —

Other insurance expense (benefit) 1.6 1.0 —

Technology and development 4.5 5.8 —

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Total share-based compensation expense $ 19.3 $ 28.8 $ 10.0

The following table provides total share-based compensation expense by type of award:

The following table provides total employee share-based compensation expense by type of award:

Years Ended December 31,

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As a result, we recognized $ 25.1 million and $ 8.6 million of share-based compensation expense related to these tender offers during the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020, there was $ 12.8 million and $ 6.9 million of unrecognized compensation cost related to unvested stocks options and restricted stock units.

The remaining costs are expected to be recognized over a period of six and four years , respectively.

As of December 31, 2021, there was $ 4.8 million, $ 35.7 million and $ 66.1 million of unrecognized compensation cost related to unvested stock options, warrants and RSUs, respectively.

The remaining costs are expected to be recognized over a period of five years for unvested stocks options, two years for warrants and four years for RSUs.

Restricted Stock Units

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Value per Share Aggregate Intrinsic Value

(in millions, except exercise price and term amounts)

(in millions, except exercise price)

Nonvested at January 1, 2020 — $ — $ —

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Nonvested at December 31, 2020 0.4 18.41 $ 6.2

Granted 12.2 9.17

Vested ( 0.1 ) 18.09 1.0

Forfeited, expired or canceled ( 3.6 ) 10.24

Nonvested at December 31, 2021 8.9 $ 9.02 $ 27.4

Stock Options

The fair value of each stock option award is estimated on the date of grant using a BSM option-pricing model that uses the weighted-average assumptions noted in the following table.

Expected volatilities are based on historical volatility of comparable publicly held companies because we did not have sufficient company-specific volatility at the time of grant.

The risk-free rate for periods within the contractual life of the option is based on the U.S.

Treasury yield curve in effect at the time of grant.

The assumptions used in the BSM option-pricing model for options granted by us in 2020 are as follows:

Range Weighted-Average

Expected term (in years) 6.0

Interest rate 0.3 % - 1.7 % 0.9 %

Volatility 19.7 % - 50.6 % 42.0 %

Grant date fair value per stock option $ 3.2

A summary of option activity for the years ended December 31, 2021 and 2020 is as follows:

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Outstanding at December 31, 2020 10.4 $ 2.39 7.75 $ 137.7

Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value

(in millions, except exercise price and term amounts)

Outstanding at January 1, 2019 10.8 $ 0.60 8.62 $ 17.8

Granted — 10.82

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A summary of total options outstanding and exercisable at December 31, 2021:

Options Outstanding Options Exercisable

Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years)

Options Outstanding and Exercisable

Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years)

(in millions, except exercise price and term amounts)

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1.0 $ 7.67 6.86

The 2015 and 2020 Plans permit the optionee to early exercise to obtain preferred tax treatment before the completion of the award’s requisite service or vesting period.

If the employee terminates employment before the end of this period, the Plans require us to repurchase the shares at the exercise price of the award.

The repurchase feature is used to require the employee to remain through the requisite service or vesting period to receive the full economic benefit of the award.

The 2020 Plan permits the optionee to early exercise options to obtain preferred tax treatment before the completion of the award’s requisite service or vesting period.

If the employee terminates employment before the end of this period, the 2020 and 2015 Plans allow us to repurchase the shares, at our option, at the exercise price of the

The repurchase feature is used to incentivize the employee to remain through the requisite service or vesting period to receive the full economic benefit of the award.

Given the repurchase feature functions as a forfeiture provision for nonvested shares, we record the exercise cost of nonvested shares as a deposit liability for those shares settling in cash.

As the shares vest, the deposit liability is reduced and Paid-In Capital is increased.

As the shares vest, the deposit liability is reduced and additional paid-in capital is increased.

As of December 31, 2021 and 2020, the early exercise deposit liability was $ 0.1 million and $ 1.3 million, respectively, and is included in other liabilities on the consolidated balance sheets.

RELATED PARTY LOANS

In July 2018 and April 2019, we entered into partial recourse promissory notes with several key employees for which proceeds were used to exercise 5.6 million in common stock options.

The “recourse portion” of the note was an amount equal to 50 % of the initial principal amount plus interested accrued on 100 % of the principal amount, while the “non-recourse portion” was equal to 50 % of the initial principal amount.

The loans originally totaled $ 4.3 million and interest was due on the unpaid balances at a weighted-average interest rate of 2.80 % compounded annually.

As the stated interest rate was below the market rate that would have been charged for a loan of this nature, the transaction was accounted for as a modification of the stock options.

An incremental expense was determined based on the difference in the fair value of the options immediately prior to the modification and the modified fair value.

While we recognized the exercised options as shares outstanding, we did not recognize the impact of the underlying loan transaction and option exercise as the transaction is considered a non-recourse receivable in accordance with ASC 718, Compensation—Stock Compensation.

In May 2020, we settled a related party loan by accepting 0.3 million unvested shares and 0.1 million vested shares in exchange for the full repayment of the related $ 0.9 million related party loan and accrued interest.

We recognized $ 0.7 million of treasury stock as a result.

In October 2020, our Board of Directors approved the forgiveness of all outstanding principal and accrued but unpaid interest for each of the remaining related party loans.

As the exercise price had effectively been reduced to zero, the forgiveness was accounted for as a modification of the stock options.

An incremental share-based compensation cost of $ 3.4 million was determined based on the difference in the fair value of the options immediately prior to the modification and the modified fair value.

Based on 0.7 million shares having vested as of December 31, 2020, we recognized $ 0.5 million of share-based compensation expense as of December 2020.

The remaining $ 2.9 million share-based compensation expense will be recognized ratably over the remaining vesting period of 6 years.

As of December 31, 2020 there were no related party loans outstanding.

As of December 31, 2019, there were related party loans outstanding with several key employees of $ 4.3 million with a weighted-average interest rate of 2.80 %.

COMMITMENTS AND CONTINGENCIES

We lease our office facilities under various non-cancelable operating lease agreements that expire in various years through February 2028.

Some of these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and other costs.

During the normal course of business, we also enter into various agreements to purchase services, primarily data and information technology based services, that are enforceable and legally binding.

During the normal course of business, we enter into various agreements to purchase services, primarily data and information technology based services, that are enforceable and legally binding.

Certain supply contracts contain penalty provisions for early termination, in addition to variable costs that are based on volume and usage.

We do not expect to incur penalty payments under these provisions that would materially affect our financial position, results of operations or cash flows.

The following table summarizes by remaining maturity, future commitments related to operating leases and other arrangements as of December 31, 2020:

Leases Purchase

The following table summarizes, by remaining maturity, future commitments related to other arrangements as of December 31, 2021:

(dollars in millions)

2021 $ 3.9 $ 10.0

2026 and thereafter —

Total $ 21.6 $ 25.6

Base rent and related rent expenses was $ 4.8 million, $ 2.4 million and $ 0.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

We entered into office leases during 2020 and 2019.

As part of the lease, the lessor provided us with tenant improvement incentives.

These non-cash incentives were zero and $ 1.5 million as of December 31, 2020 and 2019, respectively, and have been capitalized as a leasehold improvement asset with an offset to deferred rent as part of other liabilities on the consolidated balance sheets.

These leasehold improvement incentives are being amortized on a straight-line basis over the lease period as part of depreciation and amortization with deferred rent amortization offset against rent expense and included in general and administrative expenses on the consolidated statements of operations and comprehensive loss.

There are no litigation matters outstanding or pending that will have a material effect on our financial position or results of operations.

From time to time, we are party to litigation and legal proceedings relating to our business operations.

Except as disclosed below, we do not believe that we are party to any current or pending legal action that could reasonably be expected to have a material adverse effect on our financial condition or results of operations and cash flow.

On March 19, 2021, a purported class action complaint was filed against the Company and certain of its current officers and directors in the U.S.

District Court for the Southern District of Ohio (Case No.

2:21-cv-01197) on behalf of certain Root shareholders.

The complaint alleges that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and of Sections 11 and 15 of the Securities Act of 1933, in connection with and following the Company’s IPO.

The complaint seeks unspecified damages.

The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously.

The lawsuit is in the early stages and, at this time, we are unable to predict the outcome and we cannot estimate the likelihood or magnitude of our possible or potential loss contingency.

We are contingently liable for possible future assessments under regulatory requirements for insolvencies and impairments of unaffiliated insurance companies.

OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

OTHER COMPREHENSIVE (LOSS) INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in our accumulated other comprehensive income, or AOCI, for the years ended December 31, 2021, 2020 and 2019:

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(dollars in millions)

Changes in net unrealized gains on investments:

Accumulated other comprehensive income beginning balance

$ 5.6 $ 0.6 $ —

Other comprehensive income before reclassifications 5.3 0.6 —

Realized gains on investments reclassified from AOCI to net loss ( 0.3 ) — —

Net current period other comprehensive income 5.0 0.6 —

Other comprehensive (loss) income before reclassifications ( 2.8 ) 5.3 0.6

Net realized gains on investments reclassified from AOCI to net loss ( 2.4 ) ( 0.3 ) —

Net current period other comprehensive (loss) income ( 5.2 ) 5.0 0.6

Accumulated other comprehensive income ending balance $ 0.4 $ 5.6 $ 0.6

LOSS PER SHARE

EPS is presented for both basic EPS and diluted EPS.

We compute basic EPS by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

The calculation of income (loss) available to common stockholders and EPS is based on the underlying premise that all income after payment of dividends on preferred shares is available to and will be distributed to the common stockholders.

In addition to common shares outstanding, the computation of basic EPS includes instruments for which the holder has (or is deemed to have) the present rights as of the end of the reporting period to share in current period earnings (loss) with common stockholders (i.e., participating securities and common shares that are currently issuable for little or no cost to the holder).

Accordingly, we include in the denominator of our basic EPS computation the weighted-average number of shares of common stock that would be issued upon the full exercise of the warrants which have an insignificant exercise price of $ 0.0001 per share.

Diluted EPS includes all the components of basic EPS, plus the dilutive effect of common stock equivalents such as convertible securities and stock options, but excludes those common stock equivalents from the calculation of diluted EPS when the effect of inclusion, assessed individually, would be anti-dilutive.

Our potentially dilutive securities are considered antidilutive as they create a lower loss per share;

thus, diluted EPS is equal to basic EPS.

Earnings are allocated equally between each class of common stock because they are entitled to the same liquidation and dividend rights.

The following table displays the computation of basic and diluted loss per share of common stock:

The following table displays the computation of basic and diluted loss per share for both Class A and Class B common stock for the years ended December 31, 2021, 2020 and 2019:

For the Years Ended December 31,

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Weighted-average common shares outstanding:

basic and diluted 75.5 33.9 25.3

basic and diluted (both Class A and B) 249.2 75.5 33.9

Loss per common share:

basic and diluted $ ( 4.81 ) $ ( 8.33 ) $ ( 2.73 )

We excluded the following potential common shares, presented based on amounts outstanding at each year end, from the computation of diluted net loss per share attributable to common stockholders for the years indicated because including them would have had an anti-dilutive effect:

basic and diluted (both Class A and B) $ ( 2.09 ) $ ( 4.81 ) $ ( 8.33 )

We excluded the following potentially dilutive common stock equivalents, presented based on amounts outstanding at each year end, from the computation of diluted EPS attributable to common stockholders for the years indicated because including them would have had an anti-dilutive effect:

As of December 31,

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Redeemable convertible preferred stock (as converted to common stock)

Warrants to purchase common stock (1)

Warrants to purchase redeemable convertible preferred stock (as converted to common stock)

160.8 15.8 179.0

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(1) Warrants outstanding as of December 31, 2021 would result in a maximum of 129.1 million shares of Class A common stock, if they vest and are fully exercised by Carvana for cash.

STATUTORY FINANCIAL INFORMATION

Root Insurance Company and Root Property & Casualty, or our insurance subsidiaries, are required to prepare statutory financial statements in conformity with the basis of accounting practices prescribed or permitted by the Ohio DOI and Delaware DOI, respectively.

Ohio and Delaware have adopted the NAIC Accounting Practices and Procedures Manual as the basis of their statutory accounting practices.

As of December 31, 2020, Root Property & Casualty maintained statutory capital and surplus of $ 16.3 million and had a statutory net loss of $ 25.5 million for the year ended December 31, 2020.

Root Insurance Company maintained statutory capital and surplus and had statutory net loss as of and for the years ended December 31, 2020, 2019 and 2018 as follows:

As of and for the Years Ended December 31,

Ohio and Delaware have adopted the NAIC Accounting Practices and

Procedures Manual as the basis of their statutory accounting practices.

Root Insurance Company and Root Property & Casualty maintained statutory capital and surplus as of December 31, 2021 and 2020 and had statutory net loss for the years ended December 31, 2021, 2020 and 2019 as follows:

Statutory Net Loss Statutory Capital and Surplus

2021 2020 2019 (1)

(in millions)

Statutory capital and surplus $ 100.1 $ 152.3 $ 73.5

Statutory net loss ( 123.8 ) ( 157.6 ) ( 58.3 )

Root Insurance Company $ ( 126.9 ) $ ( 123.8 ) $ ( 157.6 ) $ 91.5 $ 100.1

Root Property & Casualty ( 33.4 ) ( 25.5 ) — 21.8 16.3

Total $ ( 160.3 ) $ ( 149.3 ) $ ( 157.6 ) $ 113.3 $ 116.4

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(1) Root Property and Casualty was acquired during the year-ended December 31, 2020;

as such, statutory net loss is not included in periods prior to the acquisition.

The payment of dividends by Root Insurance Company and Root Property & Casualty are subject to restrictions set forth in the insurance laws and regulations of the States of Ohio and Delaware, respectively, or the insurance laws.

The insurance laws require domestic insurance companies to notify the supervisory superintendent, commissioner and/or director to seek prior regulatory approval to pay a dividend or distribute cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory-basis policyholders' surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer as of the prior December 31.

The insurance laws require domestic insurance companies to notify the supervisory superintendent, commissioner and/or director to seek prior regulatory approval to pay a dividend or distribute cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory-basis policyholders' surplus as of the prior December 31st or (2) the statutory-basis net income of the insurer as of the prior December 31st.

During the years ended December 31, 2021, 2020 and 2019, we did not pay any dividends.

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Companies below specific trigger points or ratios are classified within certain levels, all of which require specified corrective action.

The statutory surplus for Root Insurance Company exceeded the minimum RBC requirements for the years ended December 31, 2020 and 2019.

The statutory surplus for Root Property & Casualty exceeded the minimum RBC requirements for the year ended December 31, 2020.

GEOGRAPHICAL BREAKDOWN OF DIRECT WRITTEN PREMIUM

Direct written premium, or DWP, by state is as follows:

The statutory surplus for Root Insurance Company and Root Property & Casualty exceeded the minimum RBC requirements for the years ended December 31, 2021 and 2020.

GEOGRAPHICAL BREAKDOWN OF GROSS WRITTEN PREMIUM

Gross written premium by state is as follows for the years ended December 31, 2021, 2020 and 2019:

For the Years Ended December 31,

2021 2020 2019

Amount % of DWP Amount % of DWP Amount % of DWP

Amount % of Total Amount % of Total Amount % of Total

State (dollars in millions)

Texas $ 132.5 21.5 % $ 94.7 21.0 % $ 34.2 32.1 %

$ 152.3 20.5 % $ 132.5 21.5 % $ 94.7 21.0 %

Georgia 79.2 10.7 72.4 11.7 44.0 9.8

Kentucky 33.9 5.5 46.5 10.3 11.0 10.3

Pennsylvania 30.2 4.9 25.2 5.6 5.2 4.9

Arizona 28.4 4.6 26.7 5.9 9.1 8.6

Louisiana 42.2 5.7 28.0 4.5 15.3 3.4

Missouri 26.8 4.3 22.0 4.9 4.6 4.3

Pennsylvania 39.8 5.4 30.2 4.9 25.2 5.6

Utah 33.8 4.6 26.0 4.2 17.6 3.9

Oregon 22.3 3.6 12.4 2.7 1.9 1.8

Ohio 20.4 3.3 22.8 5.0 9.0 8.5

Nevada 33.6 4.5 19.1 3.1 2.4 0.5

Colorado 33.5 4.5 20.2 3.3 8.1 1.8

South Carolina 26.3 3.5 9.6 1.6 14.4 3.2

Missouri 24.7 3.3 26.8 4.3 22.0 4.9

Arizona 23.5 3.2 28.4 4.6 26.7 5.9

All others states 253.7 34.1 223.6 36.3 180.7 40.0

$ 742.6 100.0 % $ 616.8 100.0 % $ 451.1 100.0 %

SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The consolidated statements of operations for the quarterly periods in 2020 and 2019 are unaudited and in the opinion of management include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our consolidated statements of operations and comprehensive loss.

For the 2020 Quarter Ended

March 31 June 30 September 30 December 31

(in millions, except per share data)

Net premiums earned (1)

______________

Net investment income 1.9 1.3 1.1 1.1

Net realized gains on investments — 0.1 0.1 0.1

Fee and other income 4.3 4.3 4.4 5.6

Total revenue $ 124.0 $ 121.4 $ 50.5 $ 50.9

Operating expenses:

Loss and loss adjustment expenses (1)

129.9 97.3 76.1 59.5

Sales and marketing 35.8 17.4 36.9 49.6

Other insurance (benefit) expense (1)

11.3 15.3 ( 26.3 ) ( 2.1 )

Technology and development 16.0 11.3 12.9 12.7

General and administrative (3)

30.9 11.3 16.6 19.7

Total operating expenses $ 223.9 $ 152.6 $ 116.2 $ 139.4

Interest expense (2)

5.7 7.7 19.5 44.8

Loss before income tax expense $ ( 105.6 ) $ ( 38.9 ) $ ( 85.2 ) $ ( 133.3 )

Income tax expense — — — —

Net loss $ ( 105.6 ) $ ( 38.9 ) $ ( 85.2 ) $ ( 133.3 )

Other comprehensive income ( 1.8 ) 6.7 0.1 —

Comprehensive loss $ ( 107.4 ) $ ( 32.2 ) $ ( 85.1 ) $ ( 133.3 )

Loss per common share:

basic and diluted $ ( 2.69 ) $ ( 1.03 ) $ ( 2.20 ) $ ( 0.72 )

Weighted-average common shares outstanding:

basic and diluted

39.3 37.9 38.8 185.4

(1) In July 2020, we increased our use of third-party quota share reinsurance whereby we began ceding approximately 70 % of direct earned premium to our third-party reinsurers.

This, in turn, resulted in higher cessions of incurred losses and higher ceding commission contra-expense.

For further information, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

(2) In October 2020, in connection with our IPO, the 2.8 million liability classified warrants were exercised.

As a result, the warrant liability was remeasured immediately prior to their exercise and the corresponding change in fair value was recognized as interest expense in the period.

For further information, see Note 4, “Fair Value of Financial Instruments.”

(3) In March 2020, a tender offer for common stock from vested shareholders was completed, many of whom were employees or members of the Board of Directors.

The tender offer was made at a price in excess of the fair value of our common stock.

As a result we recognized $ 17.8 million of share-based compensation expense in General and administrative during the quarter ended March 31, 2020.

For the 2019 Quarter Ended

March 31 June 30 September 30 December 31

(in millions, except per share data)

Net premiums earned $ 39.1 $ 59.5 $ 75.8 $ 100.9

Net investment income 0.7 1.0 1.1 2.4

Fee and other income 1.6 2.2 2.7 3.2

Total revenue $ 41.4 $ 62.7 $ 79.6 $ 106.5

Operating expenses:

Loss and loss adjustment expenses 50.0 59.6 100.9 110.9

Sales and marketing 16.0 23.2 34.4 36.0

Other insurance expense 8.2 10.7 15.2 18.2

Technology and development 2.8 5.6 7.0 8.6

General and administrative 13.9 8.5 9.0 11.6

Total operating expenses $ 90.9 $ 107.6 $ 166.5 $ 185.3

Interest expense (1)

0.2 2.4 13.3 6.4

Loss before income tax expense $ ( 49.7 ) $ ( 47.3 ) $ ( 100.2 ) $ ( 85.2 )

Income tax expense — — — —

Net loss $ ( 49.7 ) $ ( 47.3 ) $ ( 100.2 ) $ ( 85.2 )

Other comprehensive income:

Changes in unrealized gain on investments

0.2 0.5 0.1 ( 0.2 )

Comprehensive loss $ ( 49.5 ) $ ( 46.8 ) $ ( 100.1 ) $ ( 85.4 )

Loss per common share:

basic and diluted $ ( 1.61 ) $ ( 1.44 ) $ ( 2.88 ) $ ( 2.30 )

Weighted-average common shares outstanding:

basic and diluted

30.9 32.8 34.8 37.1

(1) During the three months ended September 30, 2019, the SAFE instrument was remeasured immediately prior to its conversion into shares of our preferred stock and the corresponding change in fair value was recognized as interest expense.

Moreover, we executed new term loans during 2019 that resulted in additional interest expense, debt related fees that were expensed as incurred, and amortization of certain capitalized debt issuance costs.

(1) Includes assumed premiums, which commenced during the year ended December 31, 2021.

Assumed written premium for the year ended December 31, 2021 was $ 16.7 million .

SUBSEQUENT EVENTS

In January 2022, we entered into a $ 300.0 million five -year term loan with BlackRock.

In connection with this term loan, we incurred debt discount and issuance costs of approximately $ 15.2 million.

Interest equal to SOFR plus 9.0 % plus 0.26161 % per annum is payable quarterly, in cash.

As part of the loan agreement, BlackRock received warrants to purchase 5.7 million shares of Class A common stock at $ 9.00 per share.

Such warrants will expire on the later of the repayment in full of the term loan and January 27, 2027.

Under certain contingent scenarios, BlackRock may also receive additional warrants to purchase shares of Class A common stock equal to 1.0 % of the aggregate number of issued and outstanding shares of our common stock on a fully-diluted basis as of the triggering date.

The additional warrants, if issued, would have an exercise price equal to the 30-trading day volume weighted average price as of the trading day immediately prior to the triggering date.

The additional warrants will expire on the later of the repayment in full of the term loan, January 27, 2027 and the date that falls 12 months after the issuance of these warrants.

On January 20, 2022, in response to inflation and loss cost trends and to further drive efficiency and increased focus on our strategic priorities, we instituted an organizational realignment, including an involuntary workforce reduction affecting approximately 330 employees, which represented approximately 20 % of our workforce.

The majority of the reduction was driven by optimizing certain sales and claims departments, especially claims support staff in first notice of loss.

These departments saw a reduced workload that corresponded with the strategic reduction in marketing spend and lower claims volume in the second half of the year.

A majority of the affected employees were notified on January 20, 2022, with most job eliminations effective in January 2022.

In the first quarter of 2022, we have recognized charges of $ 6.8 million for severance, benefits and related costs as a result of these actions, of which $ 4.3 million of these charges are expected to result in cash expenditures.

Additionally, we expect to incur real estate exit costs comprising accelerated amortization of certain right of use assets and related leasehold improvements and furniture and fixtures of approximately $ 2.4 million.

We continue to review the potential impact of the realignment, including additional facility lease exits and employee-related costs, and are unable to estimate any additional restructuring costs or charges at this time.

and CARET HOLDINGS, INC.

5 unchanged sentences

Cash and cash equivalents

432.3 1,043.1

Restricted cash

Investments in subsidiaries

Other assets 34.6 16.4

Intercompany receivable

Total Assets $ 1,237.5 $ 389.7

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

$ 749.1 $ 1,237.5

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity

Long-term debt and warrants

Investments in subsidiaries 58.5 —

Accounts payable and accrued expenses

Other liabilities

Intercompany payable 8.9 —

Total liabilities

Commitments and Contingencies

Stockholders’ equity (deficit):

Class A common stock, $ 0.0001 par value, 59.4 and zero shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively

Stockholders’ equity:

Class A common stock, $ 0.0001 par value, 142.9 and 59.4 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively

Class B common stock, $ 0.0001 par value, 109.9 and 192.2 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively

1 unchanged sentence

Additional paid-in capital

1,806.1 1,775.6

Accumulated other comprehensive income

Accumulated loss ( 1,270.1 ) ( 748.0 )

Total stockholders’ equity (deficit) 1,032.4 ( 374.0 )

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 1,237.5 $ 389.7

Total stockholders’ equity

536.4 1,032.4

Total liabilities, redeemable convertible preferred stock and stockholders’ equity

$ 749.1 $ 1,237.5

See Notes to Condensed Combined Financial Statements

8 unchanged sentences

Operating expenses:

Sales and marketing 10.0 — —

Other insurance expense 2.9 — —

Technology and development 42.5 19.5 3.5

1 unchanged sentence

Total operating expenses 60.7 57.3 19.2

Operating loss ( 56.1 ) ( 56.4 ) ( 17.6 )

Interest expense ( 20.0 ) ( 77.7 ) ( 22.3 )

Net loss before equity loss of subsidiaries ( 134.1 ) ( 39.9 ) ( 0.9 )

Loss on early extinguishment of debt ( 15.9 ) — —

Loss before income tax expense ( 92.0 ) ( 134.1 ) ( 39.9 )

Income tax expense — — —

Net loss before equity net loss of subsidiaries ( 92.0 ) ( 134.1 ) ( 39.9 )

Net loss of subsidiaries ( 429.1 ) ( 228.9 ) ( 242.5 )

Net loss ( 521.1 ) ( 363.0 ) ( 282.4 )

Other comprehensive income of subsidiaries 5.0 0.6 —

Other comprehensive (loss) income:

Other comprehensive (loss) income of subsidiaries ( 5.2 ) 5.0 0.6

Comprehensive loss $ ( 526.3 ) $ ( 358.0 ) $ ( 281.8 )

7 unchanged sentences

Cash flows from operating activities:

Net Loss $ ( 363.0 ) $ ( 282.4 ) $ ( 69.1 )

$ ( 521.1 ) $ ( 363.0 ) $ ( 282.4 )

Adjustments to reconcile net loss to net cash used in operating activities:

Share-based compensation 19.3 3.7 1.4

Warrant compensation expense

Tender offer — 25.1 8.6

1 unchanged sentence

Change in equity in subsidiaries 429.1 228.9 242.5

Loss on early extinguishment of debt

SAFE fair value adjustment — — 11.2

1 unchanged sentence

Paid-in kind interest expense 10.6 9.1 0.8

Paid-in-kind interest paid

Change in fair value of equity securities ( 3.8 ) — —

Changes in operating assets and liabilities:

13 unchanged sentences

Proceeds from issuance of common stock from IPO and concurrent private placements, net of issuance cost

Proceeds from exercise of stock options 2.1 1.9 0.1

Proceeds from issuance of preferred stock, net of issuance cost — 349.6 150.8

Proceeds from exercise of stock options and restricted stock units, net of tax proceeds/(withholding)

Proceeds from issuance of preferred stock and related warrants

126.5 — 349.6

Payment of preferred stock and related warrants issuance costs

Proceeds from debt and warrants issuance, net of issuance cost — 12.0 189.5

2 unchanged sentences

Purchases of treasury stock — ( 0.2 ) —

Net cash provided by financing activities 1,098.5 535.5 150.9

Net increase in cash and cash equivalents 826.0 176.5 40.5

Net cash (used in) provided by financing activities

( 80.3 ) 1,098.5 535.5

Net (decrease) increase in cash and cash equivalents

( 610.8 ) 826.0 176.5

Cash, cash equivalents and restricted cash at beginning of year 1,044.1 218.1 41.6

Cash, cash equivalents and restricted cash at end of year $ 433.3 $ 1,044.1 $ 218.1

Supplemental disclosures:

Interest paid $ 4.5 $ 4.3 $ 0.8

Federal income taxes paid — — —

Leasehold improvements - noncash — 1.5 2.6

Conversion of SAFE to preferred stock - noncash — 11.2 —

Conversion of preferred stock to common stock - non cash 560.4 — —

Conversion of warrants to common stock - non-cash 75.0 — —

Purchases treasury stock - non-cash 0.5 — —

See Notes to Condensed Combined Financial Statements

6 unchanged sentences

and maintains 100% ownership of Caret Holdings, Inc.

Accounting Policies

Basis of Combination —The condensed combined financial statements include the accounts of Root, Inc.

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Combination —The condensed combined financial statements include the accounts of Root, Inc.

and its wholly owned subsidiary, Caret Holdings, Inc., and are prepared in accordance with accounting principles generally accepted in the United States.

All intercompany accounts and transactions have been eliminated.

These financial statements have been combined in order to present comparative parent company financial statements for 2021, 2020 and 2019 and should be read in conjunction with our consolidated financial statements.

1 unchanged sentence

Actual results could differ from those estimates.

Statement of Cash Flows —The supplemental disclosures for cash and non-cash flows for the years ended December 31, 2021, 2020 and 2019 are as follows:

2021 2020 2019

(in millions)

Supplemental disclosures:

Interest paid $ 23.9 $ 4.5 $ 4.3

Federal income taxes paid — — —

Leasehold improvements - non-cash 1.5 — 1.5

Conversion of debt to preferred stock - non-cash — — 11.2

Conversion of preferred stock to common stock - non-cash — 560.4 —

Conversion of warrants to common stock - non-cash — 75.0 —

Lease liabilities arising from obtaining right-of-use asset

Carvana investment agreement issuance costs - non-cash 9.1 — —

Purchases of treasury stock - non-cash — 0.5 —

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed combined balance sheets that sum to the total of the same such amount in the condensed combined statements of cash flows:

(in millions)

Cash and cash equivalents $ 432.3 $ 1,043.1

Restricted cash 1.0 1.0

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

$ 433.3 $ 1,044.1

Investments in Subsidiaries —As of December 31, 2021, Caret Holdings, Inc had a negative investment in subsidiaries balance of $ 58.5 million primarily related to accumulated losses from subsidiaries.

In accordance with applicable accounting guidance, we reclassified the negative investment in subsidiaries balance to the liabilities section of our combined balance sheet.

entered into an agreement with the Superintendent of Insurance, State of Ohio, (the “Superintendent”) guaranteeing that Root Insurance Company will maintain certain capital and surplus requirements or risk-based capital levels, whichever is greater, and such additional surplus as the Superintendent requires.

The guarantee remains in effect until such time as the Superintendent may release Root, Inc.

Subsequent Events