What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-22 compared with 2022-02-23 · 507 added, 345 removed, 1006 unchanged (46% of the section changed)

4 unchanged sentences

Consolidated Statements of Operations and Comprehensive Loss

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

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity

Consolidated Statements of Cash Flows

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We have audited the accompanying consolidated balance sheets of Root, Inc.

and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes and the schedules listed in the Index at Item 8 (collectively referred to as the "financial statements").

and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes and the schedules listed in the Index at Item 8 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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.

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, 2022, 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 22, 2023, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.

Basis for Opinion

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Critical Audit Matter Description

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

As of December 31, 2022, loss and loss adjustment expense reserves were $ 287.4 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.

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 a 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 effectiveness of controls related to 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.

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Short-term investments (amortized cost:

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

$ 0.4 and zero at December 31, 2022 and December 31, 2021, respectively)

Other investments 4.4 4.7

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Premiums receivable, net of allowance of $ 2.8 and $ 5.4 at December 31, 2022 and December 31, 2021, respectively

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

Reinsurance recoverable and receivable, net of allowance of $ 0.2 at December 31, 2022 and December 31, 2021

Prepaid reinsurance premiums 74.2 100.8

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Commitments and Contingencies (Note 13)

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)

Redeemable convertible preferred stock, $ 0.0001 par value, 14.1 shares issued and outstanding at December 31, 2022 and December 31, 2021 (liquidation preference of $ 126.5 ) (Note 11)

Stockholders’ equity:

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Class B common stock, $ 0.0001 par value, 5.0 and 6.1 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively (Note 11) (1)

Treasury stock, at cost — ( 0.8 )

Additional paid-in capital 1,850.7 1,806.1

Accumulated other comprehensive income 0.4 5.6

Accumulated other comprehensive (loss) income ( 5.8 ) 0.4

Accumulated loss ( 1,567.8 ) ( 1,270.1 )

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Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ 1,312.9 $ 1,319.3

______________

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

See Notes to Consolidated Financial Statements

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Sales and marketing 48.0 270.2 139.7

Other insurance expense (benefit) 5.0 ( 1.8 ) 52.3

Other insurance (benefit) expense ( 8.0 ) 5.0 ( 1.8 )

Technology and development 55.5 65.5 52.9

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basic and diluted (both Class A and B) (1)

$ ( 21.11 ) $ ( 37.76 ) $ ( 86.43 )

Weighted-average common shares outstanding:

basic and diluted (both Class A and B) (1)

14.1 13.8 4.2

______________

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

See Notes to Consolidated Financial Statements

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020

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)

Redeemable Convertible Preferred Stock Class A and Class B Common Stock (1)

Treasury Stock (1)

Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Loss Total Stockholders' Equity (Deficit)

Shares Amount Class A Shares Class B Shares Amount Shares Amount

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

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

Tender offer — — — — — — — 8.6 — — 8.6

Common stock—option exercises — — — 2.9 — — — 1.9 — — 1.9

Reclassification of early-exercised stock option to liabilities — — — — — — — ( 1.4 ) — — ( 1.4 )

Common stock—share-based compensation expense — — — — — — — 1.4 — — 1.4

Series E—preferred stock - voting issued, net of issuance costs 21.2 349.6 — — — — — — — — —

Series E—SAFE conversion 1.3 21.2 — — — — — — — — —

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

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

Changes in other comprehensive income — — — — — — — — 5.0 — 5.0

Other comprehensive income — — — — — — — — 5.0 — 5.0

Tender offer and subsequent conversion (Note 12) 2.9 — — ( 0.2 ) — — — 25.1 — — 25.1

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Common stock—option exercises — — — 0.1 — — — 1.9 — — 1.9

Reclassification of early-exercised stock option from liabilities — — — ( 0.1 ) — — — 0.2 — — 0.2

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

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

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Balance—December 31, 2020 — $ — 3.3 10.7 $ — 0.3 $ ( 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 )

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

Balance at January 1, 2021 (as adjusted for change in accounting principle) — $ — 3.3 10.7 $ — 0.3 $ ( 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 )

Other comprehensive loss — — — — — — — — ( 5.2 ) — ( 5.2 )

Conversion of Class B to Class A common stock — — 4.5 ( 4.5 ) — — — — — — —

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Balance—December 31, 2021 14.1 $ 112.0 7.9 6.1 $ — — $ — $ 1,806.1 $ 0.4 $ ( 1,270.1 ) $ 536.4

Net loss — — — — — — — — — ( 297.7 ) ( 297.7 )

Other comprehensive loss — — — — — — — — ( 6.2 ) — ( 6.2 )

Conversion of Class B to Class A common stock — — 1.1 ( 1.1 ) — — — — — — —

Common stock—option exercises and restricted stock units vesting, net of shares withheld for employee taxes — — 0.2 — — — — 0.4 — — 0.4

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

Common stock—share-based compensation expense — — — — — — — 30.5 — — 30.5

Warrant compensation expense — — — — — — — 14.5 — — 14.5

Warrants issuance costs — — — — — — — ( 1.6 ) — — ( 1.6 )

Term Loan warrants issued — — — — — — — 0.6 — — 0.6

Balance—December 31, 2022 14.1 $ 112.0 9.2 5.0 $ — — $ — $ 1,850.7 $ ( 5.8 ) $ ( 1,567.8 ) $ 277.1

______________

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

See Notes to Consolidated Financial Statements

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Loss on early extinguishment of debt — 15.9 —

SAFE fair value adjustment — — 11.2

Warrants fair value adjustment — — 54.7

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Net realized gains on investments ( 0.5 ) ( 2.4 ) ( 0.3 )

Gain on lease modification ( 0.9 ) — —

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

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Purchases of fixed assets — ( 4.6 ) ( 1.8 )

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

Net cash (used in) provided by investing activities ( 16.6 ) 76.9 ( 114.1 )

Cash flows from financing activities:

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

Proceeds from SAFE — — 10.0

Purchases of treasury stock — — ( 0.2 )

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

Net cash provided by (used in) financing activities 283.3 ( 80.3 ) 1,098.5

Net increase (decrease) in cash, cash equivalents and restricted cash 56.1 ( 406.8 ) 697.2

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

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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.

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 and our embedded platform.

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

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All intercompany accounts and transactions have been eliminated.

To conform to the current year presentation, certain prior year amounts have been reclassified.

Use of Estimates —The preparation of consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

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, or LAE, premium write-offs, fair value of warrants, intangible asset impairment and valuation allowance for income taxes.

Revision of Previously Issued Financial Statements —During the fourth quarter of 2022, we identified immaterial errors in our first, second and third quarterly filings of 2022 in the recognition of prepaid marketing expense in other assets on our condensed consolidated balance sheets and the presentation of certain sales and marketing and general and administrative expenses on our condensed consolidated statements of operations and comprehensive loss related to the purported misappropriation of funds by a senior marketing employee.

We recognized $ 10.2 million in general and administrative expenses related to the write-off of prepaid marketing expense and reclassifications of certain sales and marketing expenses during the year-ended December 31, 2022.

The errors did not impact periods prior to 2022.

In accordance with SEC Staff Accounting Bulletin, or SAB, No.

99, Materiality, and SAB No.

108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , we assessed the materiality of these errors on our financial statements for the year ended December 31, 2022 and concluded the errors were not material to the unaudited interim financial statements for the periods ended March 31, 2022, June 30, 2022 and September 30, 2022.

Reverse Stock Split — In August 2022, an authorized subcommittee of our board of directors approved a reverse stock split of our Class A and Class B common stock at a ratio of 1-for-18.

On August 12, 2022, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to effect a 1-for-18 reverse stock split of our Class A and Class B common stock.

As a result of the reverse stock split, every 18 shares of our issued or outstanding pre-reverse split common stock of each class were combined into one share of common stock of such class.

No fractional shares were issued upon the reverse stock split.

On August 15, 2022, our Class A common stock began trading on a split-adjusted basis on the Nasdaq Stock Market.

In connection with the reverse stock split, there was no change to the shares authorized or in the par value per share of $ 0.0001 .

In addition, there was no change to the number of shares issued or outstanding for our Series A Preferred Stock.

The conversion price for our Series A Preferred Stock was adjusted to $ 162.00 and the exercise price and number of warrant shares for each of our outstanding warrants were also proportionately adjusted.

Accordingly, all historical per share data, number of shares outstanding and other common stock equivalents for the periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split.

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.

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

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

We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves.

In the ordinary course of business we also face certain lawsuits that seek damages beyond policy limits, or extra-contractual claims.

We continually evaluate potential liabilities and reserves for litigation using the guidance issued in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 450, Contingencies .

Under this guidance, we may only record reserves for a loss if as of the date the financial statements are issued or available to be issued, the likelihood of occurrence is deemed probable and we can reasonably estimate the amount of the loss.

When disclosing litigation or claims where a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made.

We consider each legal action using this guidance and record reserves for losses as warranted by establishing a reserve in loss and loss adjustment expense reserves for extra-contractual claims and other liabilities for class action and other non-claims related lawsuits in our consolidated balance sheets.

Any non-reinsurance related recoveries are recognized as other assets in our consolidated balance sheets.

We record amounts within loss and loss adjustment expenses for extra-contractual claims and general and administrative for class action and other non-claims related lawsuits in our consolidated statements of operations and comprehensive loss.

Further details are discussed in Note 13, "Commitments and Contingencies."

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.

We incurred such costs in connection with our investment agreement we entered into with Carvana Group, LLC, or Carvana, on August 21, 2021, or the Investment Agreement, and our $ 300.0 million five-year term loan maturing we entered on January 26, 2022, or the Term Loan.

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.

The transaction costs associated with this acquisition were $ 0.5 million and were allocated to the insurance license indefinite-lived intangible assets acquired.

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

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 costs, as of December 31, 2021 and 2020 in other assets in our consolidated balance sheets.

Indefinite-Lived Intangible Assets — In March 2022, we purchased the Root.com domain and recognized $ 1.3 million, including transaction costs, as of December 31, 2022 in other assets in our consolidated balance sheets.

We also had insurance licenses of $ 8.9 million, including transaction costs, as of December 31, 2022 and 2021 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.

No impairment was recognized for 2022, 2021, or 2020 related to indefinite-lived intangible assets.

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

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Leasehold improvements - non-cash 0.9 1.5 —

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

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

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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.

Cash equivalents are short-term, highly liquid investments that on average matures 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 by a financial institution to satisfy letter of credit requirements for certain property leases.

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Restricted cash 1.0 1.0

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

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows

$ 763.1 $ 707.0

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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.

Beginning with our adoption of FASB Accounting Standard Update No.

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

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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.

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 on investments in our consolidated statements of operations and comprehensive loss.

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

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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.

No such credit losses were recognized in 2022 and 2021, nor were there other than temporary impairments recognized in 2020.

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.

Such changes are accounted for within net investment income in 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.

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

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

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Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

Leases —On January 1, 2021, we adopted ASU No.

2016-02, Leases (Topic 842) which requires the recognition of right-of-use lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.

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.

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

Premiums, Premiums Receivable and Premium Write-offs —Premiums written are deferred and earned pro rata over the policy period.

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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.

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

It also includes certain 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 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.

Certain warrant compensation expense is recognized on a pro-rata basis considering progress toward completing the integrated automobile insurance solution for Carvana’s online car buying platform, or Integrated Platform, under the Carvana commercial agreement

Other Insurance (Benefit) Expense —Other insurance (benefit) expense includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, certain warrant compensation expense related to our embedded channel, 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 certain commissions, 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.

Certain warrant compensation expense is recognized on a pro-rata basis for policies originated from the Integrated Platform towards milestones as defined under the Carvana commercial agreement.

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 expense (benefit).

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

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and depreciation expense for computers, furniture and other fixed assets;

and restructuring costs associated with the involuntary workforce reductions.

Restructuring costs include severance, benefits, share-based compensation, employee compensation expense, dependent upon continuous employment for certain employees, and related employee costs, or Employee costs, real estate exit costs and software costs.

General and administrative expenses are expensed as incurred.

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.

Policy Acquisition Costs —Acquisition costs consist primarily of premium taxes, certain marketing costs and underwriting expenses, and certain 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.

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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 in 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.

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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.

Allowance for credit losses was $ 0.2 million as of December 31, 2022 and 2021, respectively.

Income Taxes —For the 2022 tax year, Root, Inc.

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The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are recognized to the extent that there is sufficient positive evidence, as allowed under the Accounting Standard Codification, or ASC, 740, Income Taxes , to support the recoverability of those deferred tax assets.

We establish a valuation allowance to the extent that there is insufficient evidence to support the recoverability of the deferred tax asset under ASC 740.

Deferred tax assets are recognized as allowed under ASC 740, Income Taxes .

We establish a valuation allowance when there is more likely than not insufficient evidence to support the recoverability of the deferred tax asset under ASC 740.

In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations.

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We amortized internally developed software of $ 5.0 million, $ 3.7 million and $ 2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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

The capitalized cost and accumulated amortization of internally developed software in other assets in our consolidated balance sheets at December 31, 2022 and 2021 are as follows:

(dollars in millions)

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Fixed Assets —Fixed Assets are carried at cost, net of accumulated depreciation.

We capitalize purchases of fixed assets with costs greater than $1,000, including computers, furniture, and leasehold improvements.

We capitalize purchases of certain fixed assets, including computers, furniture, and leasehold improvements.

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

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For the years ended December 31, 2022, 2021 and 2020, depreciation expense was $ 2.1 million, $ 4.6 million and $ 3.1 million, respectively.

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

The capitalized cost and accumulated depreciation of fixed assets in other assets in our consolidated balance sheets at December 31, 2022 and 2021 are as follows:

(dollars in millions)

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Fixed assets, net $ 5.5 $ 10.3

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.

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

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.

Warrant Compensation —In October 2021, we closed the Investment Agreement with 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 the Integrated Platform.

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

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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 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.

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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.

These warrants vest as the parties develop an integrated automobile insurance solution for 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.

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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.

Accordingly, the warrants issued in connection with our $ 100.0 million term loan entered on November 25, 2019, or Term Loan B, were included in the 2020 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.

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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 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.

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.

Recently Adopted Accounting Pronouncements —There were no accounting standards adopted in 2022 that had a material impact in our consolidated financial statements.

Recently Issued Financial Accounting Standards Not Yet Adopted —We assess the adoption impacts of recently issued accounting standards by the FASB in our consolidated financial statements as well as material updates to previous assessments, if any from our 2021 Form 10-K.

There were no accounting standards issued in 2022 that are expected to have a material impact in our consolidated financial statements.

The amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities at December 31, 2022 and 2021 are as follows:

Amortized Cost Allowance for Expected Credit Losses (1)

Gross Unrealized Gains Gross Unrealized Losses Fair Value

Amortized Cost Allowance for Expected Credit Losses Gross Unrealized Gains Gross Unrealized Losses Fair Value

(dollars in millions)

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Other debt obligations 11.1 — 0.1 ( 0.2 ) 11.0

Total fixed maturities 134.2 — 0.1 ( 5.9 ) 128.4

Short-term investments 0.4 — — — 0.4

Total $ 134.6 $ — $ 0.1 $ ( 5.9 ) $ 128.8

_______________

(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

Amortized Cost Allowance for Expected Credit Losses 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

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:

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, 2022 and 2021.

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

The following tables reflect the gross unrealized losses and fair value of short-term investments and available-for-sale fixed maturity securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2022 and 2021:

Less than 12 Months 12 Months or More Total

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(dollars in millions)

Fixed maturities:

Treasury securities and agencies $ 6.9 $ ( 0.1 ) $ 4.1 $ ( 0.2 ) $ 11.0 $ ( 0.3 )

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Commercial mortgage-backed securities 18.3 ( 0.8 ) 4.6 ( 0.4 ) 22.9 ( 1.2 )

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

Other debt obligations 6.8 ( 0.2 ) — — 6.8 ( 0.2 )

Total fixed maturities 91.0 ( 3.2 ) 30.3 ( 2.7 ) 121.3 ( 5.9 )

Short-term investments 0.1 — — — 0.1 —

Total $ 91.1 $ ( 3.2 ) $ 30.3 $ ( 2.7 ) $ 121.4 $ ( 5.9 )

Less than 12 Months 12 Months or More Total

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(dollars in millions)

Fixed maturities:

Treasury securities and agencies $ 7.5 $ — $ ( 0.1 ) $ 14.0 $ ( 0.3 ) $ 21.5 $ ( 0.4 )

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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 $ 29.6 $ ( 0.1 ) $ — $ — $ 29.6 $ ( 0.1 )

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:

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

Other Investments

As of December 31, 2022 and 2021, other investments related to our private equity investments were $ 4.4 million and $ 4.7 million, respectively.

We recognized $ 1.2 million and zero of realized gains in December 31, 2022 and 2021, respectively.

We recorded the sale of one of our private equity investments within net realized gains on investments in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2022.

There were no impairment losses recognized on private equity investments for the years ended December 31, 2022 and 2021.

The following table reflects the gross and net realized gains and losses on short-term investments, available-for-sale fixed maturities and other investments that have been included in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2022, 2021 and 2020:

2022 2021 2020

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Net realized gains on investments $ 0.5 $ 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:

The following table sets forth the amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities by contractual maturity at December 31, 2022:

Amortized Cost Fair Value

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Net investment income $ 6.2 $ 5.0 $ 5.4

The following tables summarize the credit ratings of investments at December 31, 2021 and 2020

______________

(1) Unrealized gains resulting from observable price changes related to our private equity investments.

The following tables summarize the credit ratings of short-term investments and available-for-sale fixed maturity securities at December 31, 2022 and 2021:

December 31, 2022

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Total fixed maturities 9.2 119.2 — 128.4

Short-term investments — 0.4 — 0.4

Cash equivalents 487.3 — — 487.3

Total assets at fair value $ 496.5 $ 119.6 $ — $ 616.1

$ 149.6 $ 107.3 $ — $ 256.9

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

Total assets at fair value $ 149.6 $ 107.3 $ — $ 256.9

$ 587.6 $ 204.8 $ — $ 792.4

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.

We estimate the fair value of all our different classes of Level 2 fixed 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.

All significant inputs were observable in the active markets.

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

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Fair Value of Long-Term Debt

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

The carrying amount of long-term debt is recorded at the unpaid balance, net of discount and debt issuance costs.

The fair value of outstanding long-term debt as of December 31, 2022 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, 2022 and 2021, the carrying amounts and fair values of these financial instruments were as follows:

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Gross loss and LAE reserves, December 31 $ 287.4 $ 320.2 $ 237.2

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.

Incurred losses and LAE attributable to prior accident years was an increase of $ 2.9 million, a decrease of $ 13.6 million and an increase of $ 20.9 million during 2022, 2021 and 2020, respectively.

The increase to incurred losses for prior accident years in 2022 of $ 2.9 million was primarily driven by higher-than-expected reported losses from accident year 2021 material damage claims due to higher replacement parts cost and growth in used car values.

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 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 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 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:

Incurred Losses and ALAE—Net of Reinsurance

Accident Year 2017 (unaudited)

2018 (unaudited)

2019 (unaudited)

2020 (unaudited)

2021 IBNR Reported Claims (1)

Accident Year 2017 (unaudited) 2018 (unaudited) 2019 (unaudited) 2020 (unaudited) 2021

(unaudited) 2022 IBNR Reported Claims (1)

(dollars in millions)

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2021 341.6 348.1 14.3 151,988

2022 296.0 50.1 115,312

Total $ 1,285.7 $ 70.0 493,477

Cumulative Paid Losses and ALAE—Net of Reinsurance

Accident Year 2017 (unaudited)

2018 (unaudited)

2019 (unaudited)

Accident Year 2017 (unaudited) 2018 (unaudited) 2019 (unaudited) 2020 (unaudited) 2021

(unaudited) 2022

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2020 182.0 238.5 269.9

2021 179.4 294.6

Total 1,090.7

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Our reinsurance recoverable on unpaid losses gross of the provision for loss corridor, loss ratio caps and allowance for credit losses was $ 143.3 million and $ 160.7 million as of December 31, 2022 and 2021, 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, 2022 and 2021, a provision for loss corridor of $ 66.2 million and $ 80.4 million, respectively, was recorded as a contra-asset in reinsurance recoverable on the consolidated balance sheets.

LONG-TERM DEBT

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.

In January 2022, we entered into the Term Loan, with the full principal amount due and payable upon maturity on January 27, 2027.

Interest is payable quarterly and is determined on a floating interest rate currently calculated on the Secured Overnight Financing Rate, or SOFR, with a 1.0 % floor, plus 9.0 %, plus 0.26161 % per annum.

As part of the loan agreement, we issued warrants to the lender to purchase approximately 0.3 million shares of our Class A common stock at a strike price of $ 162.00 per share.

Such warrants will expire on the later of the repayment in full of the Term Loan or January 27, 2027.

The total fair value of these warrants at January 27, 2022 was $ 0.6 million.

The Term Loan contains debt covenants which, among other things, require cash and cash equivalents held in entities other than our insurance subsidiaries to be at least $ 200.0 million at all times.

This threshold may be reduced to $ 150.0 million under two sets of circumstances:

issuing 62,500 insurance policies through our Carvana embedded product and achieving a ratio of direct contribution to gross premiums earned of 12 %;

or ceasing any customer acquisition spend outside of the Carvana commercial agreement and reducing our monthly cash burn to no greater than $ 12.0 million.

Under the latter set of circumstances, we must issue additional warrants to purchase shares of our Class A common stock equal to 1.0 % of the aggregate number of issued and outstanding shares of Class A common stock on a fully-diluted basis as of the date the threshold is reduced.

The additional warrants, if issued, would have an exercise price equal to the 30 -trading day volume weighted average price of the Class A common stock 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 or the date that falls 12 months after the issuance of these warrants.

As of December 31, 2022, the fair value of these 1.0 % warrants was immaterial to our consolidated financial statements.

On November 8, 2021, we extinguished Term Loan B for $ 120.9 million, consisting of $ 100.0 million principal balance and $ 20.9 million of accrued interest, including paid-in-kind 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

In October 2021, upon maturity of our $ 100 million term loan, or Term Loan A, we repaid the outstanding 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 the termination.

The following summarizes the carrying value of long-term debt and warrants as of December 31, 2022 and 2021:

(dollars in millions)

Term Loan A $ — $ 99.5

Term Loan B — 100.0

Total — 199.5

Accrued interest payable

Unamortized discount and debt and warrant issuance costs

Unamortized discount and debt issuance costs and warrants

Total $ 295.4 $ —

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.

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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.

We use the implicit

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

Our leases 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.

The following table summarizes supplemental balance sheets information related to leases at December 31, 2022 and 2021:

Operating leases:

(dollars in millions)

Operating lease right-of-use liabilities $ 10.5 $ 14.1

Operating lease right-of-use assets $ 4.3 $ 5.1

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.

The components of lease costs for the years ended December 31, 2022 and 2021, are as follows:

Years Ended December 31,

Lease cost components:

(dollars in millions)

Operating lease costs (1)

______________

(1) Variable lease expense and short-term lease expense recognized during the years ended December 31, 2022 and 2021 were not material.

Supplemental cash flow information for the years ended December 31, 2022 and 2021, are as follows:

(dollars in millions)

Operating cash flows paid for amounts included in the measurement of lease liabilities $ 3.9 $ 3.8

In October 2022, we reduced our square footage at one of our offices.

The amendment triggered a remeasurement of the operating lease assets and liabilities at the modification date, resulting in a decrease of $ 0.9 million as of December 31, 2022.

The modification also resulted in a $ 0.9 million gain for the year ended December 31, 2022.

The gain is a contra-expense in general and administrative expenses on the consolidated statements of operations and comprehensive loss.

In August 2022, we ceased using a portion of our corporate headquarters and extended the lease term on the remaining portion to December 31, 2027.

The amendment triggered a change in estimate to the respective useful lives, which has been accounted for as a lease modification.

The operating lease assets and liabilities were remeasured at the modification date, resulting in an increase of $ 1.4 million as of December 31, 2022.

During evaluation of our office space needs in 2021, we determined our Easton facility in Columbus, Ohio had 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 and the related assets and cash flows are not material to our consolidated financial statements as of and for the years ended December 31, 2022 and 2021.

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

The weighted average remaining lease term and weighted average operating lease discount rate, for the years ended December 31, 2022 and 2021 are as follows:

Weighted average of remaining operating lease term (years) 4.6 4.4

Weighted average operating lease discount rate 11.8 % 10.8 %

Future lease payments as of December 31, 2022 were as follows:

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Total lease liabilities $ 10.5

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, 2022, 2021 and 2020:

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Nondeductible compensation 1.3 ( 0.4 ) 1.8 ( 0.3 ) — —

Return to provision permanent adjustments ( 3.5 ) 1.2 ( 0.5 ) 0.1 — —

State net operating loss ( 7.1 ) 2.4 ( 4.9 ) 0.9 ( 3.1 ) 0.9

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Deferred compensation 6.1 2.5

Stock compensation 5.4 0.5

Stock and warrant compensation 9.5 5.4

Unrealized losses 1.4 —

Other 0.1 2.6

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As such, a valuation allowance of $ 322.3 million has been established.

We have carryforwards related to net operating losses of $ 1,042.6 million, of which $ 496.1 million begin to expire in tax years 2035 through 2041, with the remaining $ 546.5 million carried forward indefinitely.

We also have carryforwards for credits related to research and development costs of $ 0.9 million which expire between tax years 2036 through 2038, and state operating losses of $ 113.8 million which expire between tax years 2029 through 2041.

We have experienced an ownership change under Section 382 of the Internal Revenue Code, or the Code.

Accordingly, use of a portion of our net operating losses, or NOLs, and tax credit carryforwards are subject to an annual limitation under Section 382 of the Code.

We do not expect any of our deferred tax assets related to our NOLs or tax credit carryforwards to expire unutilized as a result of this limitation.

The following table sets forth carryforwards related to NOLs and tax credits:

Carryforward with Expiration Carryforward Indefinitely Total Years of Expiration

(dollars in millions)

Federal $ 640.7 $ 628.2 $ 1,268.9 2035 - 2042

State (gross, apportioned) 238.4 55.7 294.1 2024 - 2042

Research and development credits 0.9 — 0.9 2036 - 2038

Total $ 880.0 $ 683.9 $ 1,563.9

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

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The federal statute of limitations is generally three years.

Currently all state income and franchise tax returns are within each taxing authorities statute of limitations and are still subject to examination.

Currently all state income and franchise tax returns are within each taxing authorities statute of limitations and are subject to examination.

RESTRUCTURING COSTS

In November 2022, we initiated a company-wide involuntary workforce reduction as part of our efforts to improve efficiency and operating costs, and prioritize resources to further strengthen our pricing and underwriting foundation and the continued development of our embedded products, or November 2022 Restructuring.

As a result of the November 2022 Restructuring, we incurred severance, benefits, share-based compensation, employee compensation expense dependent upon continuous employment for certain employees, and related employee costs, or Employee costs.

In 2023, we expect to incur approximately $ 6.6 million of employee compensation expense, dependent upon continuous employment for certain employees, to be recognized ratably through the fourth quarter of 2023.

We expect a cash expenditure related to these employee compensation costs in the first quarter of 2024.

We do not expect to incur any material additional expenditures related to real estate exit costs or software costs in future periods.

In January 2022, we instituted an organizational realignment, which included an involuntary workforce reduction, due to inflation and loss cost trends and to further drive efficiency and increased focus on our strategic priorities, or January 2022 Restructuring.

As a result of the January 2022 Restructuring, we incurred Employee costs and accelerated expense for software that no longer has economic benefit.

Additionally, we incurred real estate exit costs related to certain floors of our corporate headquarters in Columbus, Ohio that we ceased using.

To the extent we had no intent or ability to sublease the space, we accelerated the amortization of the related right-of-use assets, leasehold improvements and furniture and fixtures.

For subleased space, we recognized sublease income as an offset to amortization of the right-of-use asset.

As of December 31, 2022, we do not expect to incur any material additional expenditures in future periods related to the January 2022 Restructuring.

The following table displays restructuring costs recorded in general and administrative expenses on the consolidated statements of operations and comprehensive loss:

Years Ended December 31,

2022 2021 2020

Restructuring costs:

(dollars in millions)

Employee costs $ 15.5 $ — $ —

Real estate exit costs 2.1 — —

Software costs 1.0 — —

Total restructuring costs $ 18.6 $ — $ —

The following table displays a rollforward of the accrual for restructuring costs recorded in other liabilities on the consolidated balance sheets:

Employee costs Software costs Total liability

Restructuring activity:

(dollars in millions)

Restructuring liability as of December 31, 2021 $ — $ — $ —

Expense incurred 10.2 1.0 11.2

Payments ( 7.1 ) ( 0.9 ) ( 8.0 )

Restructuring liability as of December 31, 2022 $ 3.1 $ 0.1 $ 3.2

CAPITAL STOCK

In August 2022, an authorized subcommittee of our board of directors approved a reverse stock split of our Class A and Class B common stock at a ratio of 1-for-18, which became effective on August 12, 2022.

Accordingly, all common stock, equity award, warrant, and per share amounts have been adjusted to reflect the reverse stock split for all prior periods presented.

Our total authorized shares consist of 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.

For additional information related to the reverse stock split, see Note 2, “Basis of Presentation and Significant Accounting Policies.”

As of December 31, 2022, the Company has issued and outstanding:

9.2 million shares of Class A common stock, 5.0 million shares of Class B common stock, and 14.1 million shares of preferred stock that have a redemption value of $ 126.5 million.

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.

Further details on the warrants are discussed in Note 12, "Share-Based Compensation." In connection with the Investment Agreement, we incurred issuance costs of $ 19.6 million, $ 9.0 million of which were 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.

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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.

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.

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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.

We are not permitted to 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 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.

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SHARE-BASED COMPENSATION

2020 Equity Incentive Plan

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, 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, 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.

In addition, the number of shares reserved for issuance under the ESPP is subject to an annual increase on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, in an amount equal to the lesser of (i) 1 % of the total number of shares of capital stock outstanding on December 31st of the preceding year and (ii) 7.5 million shares of Class A common stock.

Our Board of Directors 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 stock.

2015 Equity Incentive Plan

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.

Accordingly, all stock, equity award, warrant, and per share amounts have been adjusted to reflect the reverse stock split for all prior periods presented.

As part of the Investment Agreement discussed in Note 11, “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 7.2 million shares of Class A common stock.

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

As of December 31, 2022, we determined the remaining unvested 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.

We recognized warrant compensation expense related to these equity-classified warrants based on progress toward completing the Integrated Platform, and policies originating through the Integrated Platform.

In September 2022, the Integrated Platform launched and as a result, tranche 1 of our short-term warrants vested.

There were no exercises upon vesting and all warrants remain outstanding.

All of these warrants are out-of-the-money and therefore have no intrinsic value as of December 31, 2022.

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 displays warrant compensation expense recorded in the consolidated statements of operations and comprehensive loss:

Years Ended December 31,

2022 2021 2020

(dollars in millions)

Warrant compensation expense:

Sales and marketing $ 8.8 $ 8.8 $ —

Other insurance (benefit) expense 5.7 — —

Total warrant compensation expense $ 14.5 $ 8.8 $ —

The short-term warrants will expire September 1, 2025 and the long-term warrants will expire September 1, 2027.

The following table provides other key terms of the warrants:

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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.

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.

As of December 31, 2022, there was $ 21.1 million of unrecognized compensation cost related to the warrants.

The remaining costs are expected to be recognized over a period of approximately two years .

Employee Share-Based Compensation

2020 Equity Incentive Plan

As of December 31, 2022, the number of shares authorized under the 2020 Plan was 3.2 million shares of Class A common stock, 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.

However, the board of directors 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 stock.

The aggregate maximum number of shares of Class A common stock that may be issued pursuant to the exercise of incentive stock options is 6.7 million shares.

As of December 31, 2022, the number of shares available for issuance under the 2020 Plan was 1.8 million.

In August 2022, our board of directors approved the First Amendment to our 2020 Employee Stock Purchase Plan, or ESPP.

The number of shares of Class A common stock initially reserved for issuance under the ESPP is limited to 0.3 million shares.

In addition, the number of shares reserved for issuance under the ESPP is subject to an annual increase on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, in an amount equal to the lesser of (i) 1 % of the total number of shares of capital stock outstanding on December 31 of the preceding year and (ii) 0.4 million shares of Class A common stock.

Our board of directors 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 stock.

2015 Equity Incentive Plan

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

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Sales and marketing 0.8 1.0 1.0

Other insurance expense (benefit) 1.6 1.0 —

Other insurance (benefit) expense 0.8 1.6 1.0

Technology and development 3.3 4.5 5.8

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To encourage participation, the tender offer was made at a price in excess of the fair value of our common stock.

In February 2019, a similar tender offer by another investor was completed.

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, 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.

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

As of December 31, 2022, there was $ 2.2 million and $ 40.2 million of unrecognized compensation cost related to unvested stock options and RSUs, respectively.

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

Restricted Stock Units

A summary of RSU activity for the year ended December 31, 2021 is as follows:

A summary of RSU activity for the year ended December 31, 2022 and 2021 is as follows:

Restricted Stock Units

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Value per Share Aggregate Intrinsic Value

(in millions, except exercise price)

(in millions, except per share amounts)

Nonvested at January 1, 2021 — $ 331.38 $ 6.2

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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

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 award.

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 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.

As of December 31, 2022 and 2021, share repurchase obligations were immaterial to our consolidated financial statements.

COMMITMENTS AND CONTINGENCIES

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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.

On February 9, 2023, a purported class action complaint was filed against the Company’s subsidiary, Root Insurance Company, in the U.S.

District Court for the Middle District of Louisiana (Case No.

3:23-cv-00089-JWD-RLB) by an individual on her behalf and further claiming to represent a putative class of insureds.

The complaint alleges that the defendant breached its insurance contract and violated specific provisions of the Louisiana law in settling her vehicle total loss claim.

The complaint seeks damages to include payment of alleged benefits owed under the policy, in addition to pre- and post-judgment interest, statutory penalties, attorneys fees and costs, and injunctive relief on behalf of the named plaintiff and the putative class members.

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

The lawsuit is in its early stages.

Therefore, at this time, we cannot predict the outcome or estimate the likelihood or magnitude of our possible or potential loss contingency.

On December 19, 2022, a purported class action complaint was filed against the Company’s subsidiary, Root Insurance Company, in the U.S.

District Court for the Western District of Texas (Case No.

1:22-cv-01328-LY) by an individual on her behalf and further claiming to represent a putative class of insureds.

The complaint alleges that the defendant breached its insurance contract and violated specific provisions of the Texas Prompt Payment of Claims Act for an alleged failure to include sales tax in total loss vehicle settlements.

The complaint seeks damages to include payment of alleged benefits owed under the policy, in addition to pre- and post-judgment interest and attorneys fees on behalf of the named plaintiff and the putative class members.

The defendant has moved to dismiss the claims set forth in the complaint.

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

The lawsuit is in its early stages.

Therefore, at this time, we cannot predict the outcome or estimate the likelihood or magnitude of our possible or potential loss contingency.

On June 27, 2022, a verified shareholder derivative complaint was filed against certain of the Company’s current and former officers and directors in the U.S.

District Court for the District of Delaware (Case No.

1:22-cv-00865).

The Company was named as a nominal defendant.

The complaint alleges that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, breached their fiduciary duties and/or aided and abetted the breach of fiduciary duties, were unjustly enriched, wasted corporate assets, and are liable under Section 11(f) of the Securities Act, in connection with and following the Company’s IPO.

The complaint seeks unspecified damages.

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

The lawsuit is currently stayed pending resolution of the motion to dismiss filed by the defendants in the below matter 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.

On March 19, 2021, a purported class action complaint was filed against the Company and certain of its current and former 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 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, or the Exchange Act, and Rule 10b-5 thereunder, and of Sections 11 and 15 of the Securities Act of 1933, or the Securities Act, in connection with and following the Company’s IPO.

The complaint seeks unspecified damages.

The defendants have moved to dismiss the claims set forth in the complaint.

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

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

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:

OTHER COMPREHENSIVE (LOSS) INCOME AND ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the changes in our accumulated other comprehensive (loss) income, or AOCI, for the years ended December 31, 2022, 2021 and 2020:

For the Years Ended December 31,

2022 2021 2020

(dollars in millions)

Accumulated other comprehensive income beginning balance

$ 5.6 $ 0.6 $ —

Beginning balance $ 0.4 $ 5.6 $ 0.6

Other comprehensive (loss) income before reclassifications ( 6.9 ) ( 2.8 ) 5.3

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

Net realized losses (gains) on investments reclassified from AOCI to net loss 0.7 ( 2.4 ) ( 0.3 )

Other comprehensive (loss) income ( 6.2 ) ( 5.2 ) 5.0

Ending balance $ ( 5.8 ) $ 0.4 $ 5.6

LOSS PER SHARE

Accordingly, all stock, equity award, warrant, and per share amounts have been adjusted to reflect the reverse stock split for all prior periods presented.

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, 2022, 2021 and 2020:

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Warrants to purchase common stock 7.7 7.2 —

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

160.8 15.8 179.0

_______________

(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.

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, 2022 and 2021 and had statutory net loss for the years ended December 31, 2022, 2021 and 2020 as follows:

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Total $ ( 156.5 ) $ ( 160.3 ) $ ( 149.3 ) $ 97.3 $ 113.3

_______________

(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 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.

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.

During the years ended December 31, 2022, 2021 and 2020, Root Insurance Company and Root Property & Casualty did not pay any dividends.

The insurance laws also require domestic insurers to seek prior regulatory approval for any dividend paid from other than earned surplus.

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The formulas in the model for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk.

Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC, as defined by the NAIC.

Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC, as

defined by the NAIC.

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 and Root Property & Casualty exceeded the minimum RBC requirements for the years ended December 31, 2022 and 2021.

GEOGRAPHICAL BREAKDOWN OF GROSS WRITTEN PREMIUM

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

GEOGRAPHICAL BREAKDOWN OF GROSS PREMIUMS WRITTEN

Gross premiums written by state is as follows for the years ended December 31, 2022, 2021 and 2020:

For the Years Ended December 31,

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State (dollars in millions)

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

Texas $ 109.3 18.2 % $ 152.3 20.5 % $ 132.5 21.5 %

Georgia 62.3 10.4 79.2 10.7 72.4 11.7

Louisiana 42.2 5.7 28.0 4.5 15.3 3.4

Colorado 40.6 6.8 33.5 4.5 20.2 3.3

Pennsylvania 34.9 5.8 39.8 5.4 30.2 4.9

Louisiana 33.1 5.5 42.2 5.7 28.0 4.5

Utah 30.9 5.2 33.8 4.6 26.0 4.2

Nevada 28.4 4.7 33.6 4.5 19.1 3.1

Colorado 33.5 4.5 20.2 3.3 8.1 1.8

South Carolina 20.1 3.4 26.3 3.5 9.6 1.6

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

Oklahoma 19.8 3.3 22.5 3.0 18.6 3.0

Indiana 17.8 3.0 21.7 2.9 18.1 2.9

All others states 202.8 33.7 257.7 34.7 242.1 39.3

Total $ 600.0 100.0 % $ 742.6 100.0 % $ 616.8 100.0 %

REVISION OF PREVIOUSLY ISSUED QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)

Presented below are the revisions to the previously issued quarterly financial statements for immaterial errors in 2022 related to the purported misappropriation of funds by a former senior marketing employee as disclosed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” The following tables present the effect of the revision on the condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of redeemable convertible preferred stock and stockholders' equity and condensed consolidated statements of cash flows.

Three Months Ended March 31, 2022 (unaudited)

As reported Adjustments As Corrected

Condensed consolidated statement of operations and comprehensive loss data:

(in millions, except per share amounts)

Sales and marketing $ 14.7 $ 0.6 $ 15.3

General and administrative 30.0 0.5 30.5

Total operating expenses 156.3 1.1 157.4

Operating loss ( 70.9 ) ( 1.1 ) ( 72.0 )

Loss before income tax expense ( 76.4 ) ( 1.1 ) ( 77.5 )

Net loss ( 76.4 ) ( 1.1 ) ( 77.5 )

Comprehensive loss $ ( 80.1 ) $ ( 1.1 ) $ ( 81.2 )

Weighted-average common shares outstanding:

basic and diluted (both Class A and B) (1)

Loss per common share:

basic and diluted (both Class A and B) (1)

$ ( 5.46 ) $ ( 5.54 )

______________

(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.

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

Three Months Ended June 30, 2022 (unaudited) Six Months Ended June 30, 2022 (unaudited)

As reported Adjustments As Corrected As reported Adjustments As Corrected

Condensed consolidated statements of operations and comprehensive loss data:

(in millions, except per share amounts) (in millions, except per share amounts)

Sales and marketing $ 25.4 $ ( 4.0 ) $ 21.4 $ 40.1 $ ( 3.4 ) $ 36.7

General and administrative 29.9 9.6 39.5 59.9 10.1 70.0

Total operating expenses 161.1 5.6 166.7 317.4 6.7 324.1

Operating loss ( 80.7 ) ( 5.6 ) ( 86.3 ) ( 151.6 ) ( 6.7 ) ( 158.3 )

Loss before income tax expense ( 89.9 ) ( 5.6 ) ( 95.5 ) ( 166.3 ) ( 6.7 ) ( 173.0 )

Net loss ( 89.9 ) ( 5.6 ) ( 95.5 ) ( 166.3 ) ( 6.7 ) ( 173.0 )

Comprehensive loss $ ( 91.2 ) $ ( 5.6 ) $ ( 96.8 ) $ ( 171.3 ) $ ( 6.7 ) $ ( 178.0 )

Weighted-average common shares outstanding:

basic and diluted (both Class A and B) (1)

14.1 14.1 14.0 14.0

Loss per common share:

basic and diluted (both Class A and B) (1)

$ ( 6.38 ) $ ( 6.77 ) $ ( 11.88 ) $ ( 12.36 )

______________

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

Three Months Ended September 30, 2022 (unaudited) Nine Months Ended September 30, 2022 (unaudited)

As reported Adjustments As Corrected As reported Adjustments As Corrected

Condensed consolidated statements of operations and comprehensive loss data:

(in millions, except per share amounts) (in millions, except per share amounts)

Sales and marketing $ 5.7 $ 2.4 $ 8.1 $ 45.8 $ ( 1.0 ) $ 44.8

General and administrative 26.4 — 26.4 86.3 10.1 96.4

Total operating expenses 128.4 2.4 130.8 445.8 9.1 454.9

Operating loss ( 54.7 ) ( 2.4 ) ( 57.1 ) ( 206.3 ) ( 9.1 ) ( 215.4 )

Loss before income tax expense ( 64.0 ) ( 2.4 ) ( 66.4 ) ( 230.3 ) ( 9.1 ) ( 239.4 )

Net loss ( 64.0 ) ( 2.4 ) ( 66.4 ) ( 230.3 ) ( 9.1 ) ( 239.4 )

Comprehensive loss $ ( 66.3 ) $ ( 2.4 ) $ ( 68.7 ) $ ( 237.6 ) $ ( 9.1 ) $ ( 246.7 )

Weighted-average common shares outstanding:

basic and diluted (both Class A and B) (1)

14.1 14.1 14.0 14.0

Loss per common share:

basic and diluted (both Class A and B) (1)

$ ( 4.54 ) $ ( 4.71 ) $ ( 16.45 ) $ ( 17.10 )

______________

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

As of March 31, 2022 (unaudited)

As reported Adjustments As Corrected

Condensed consolidated statement of redeemable convertible preferred stock and stockholders equity data:

(in millions)

Accumulated loss $ ( 1,346.5 ) $ ( 1.1 ) $ ( 1,347.6 )

Total stockholders’ equity $ 468.7 $ ( 1.1 ) $ 467.6

As of June 30, 2022 (unaudited)

As reported Adjustments As Corrected

Condensed consolidated statement of redeemable convertible preferred stock and stockholders equity data:

(in millions)

Accumulated loss $ ( 1,436.4 ) $ ( 6.7 ) $ ( 1,443.1 )

Total stockholders’ equity $ 388.0 $ ( 6.7 ) $ 381.3

As of September 30, 2022 (unaudited)

As reported Adjustments As Corrected

Condensed consolidated statement of redeemable convertible preferred stock and stockholders equity data:

(in millions)

Accumulated loss $ ( 1,500.4 ) $ ( 9.1 ) $ ( 1,509.5 )

Total stockholders’ equity $ 330.9 $ ( 9.1 ) $ 321.8

Three Months Ended March 31, 2022 (unaudited)

As reported Adjustments As Corrected

Condensed consolidated statement of cash flows data:

(in millions)

Net loss $ ( 76.4 ) $ ( 1.1 ) $ ( 77.5 )

Other assets 4.9 1.1 6.0

Net cash used in operating activities $ ( 51.2 ) $ — $ ( 51.2 )

Six Months Ended June 30, 2022 (unaudited)

As reported Adjustments As Corrected

Condensed consolidated statement of cash flows data:

(in millions)

Net loss $ ( 166.3 ) $ ( 6.7 ) $ ( 173.0 )

Other assets ( 10.5 ) 6.7 ( 3.8 )

Net cash used in operating activities $ ( 104.9 ) $ — $ ( 104.9 )

Nine Months Ended September 30, 2022 (unaudited)

As reported Adjustments As Corrected

Condensed consolidated statement of cash flows data:

(in millions)

Net loss $ ( 230.3 ) $ ( 9.1 ) $ ( 239.4 )

Other assets ( 11.1 ) 9.1 ( 2.0 )

Net cash used in operating activities $ ( 163.9 ) $ — $ ( 163.9 )

QUARTERLY FINANCIAL DATA (UNAUDITED)

The interim financial statements for the quarterly periods in 2022 are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the periods presented.

Information for the three months ended March 31, 2022, June 30, 2022 and September 30, 2022 have been adjusted to correct immaterial errors.

For additional information, refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” and Note 18, “Revision of Previously Issued Financial Statements.”

For the 2022 Quarter Ended

March 31 June 30 September 30 December 31

(in millions, except per share data)

Net premiums earned $ 78.3 $ 74.7 $ 68.6 $ 64.3

Net investment income 0.6 0.7 0.9 4.0

Net realized gains (losses) on investments 1.2 ( 0.1 ) — ( 0.6 )

Fee income 4.9 4.4 3.8 3.4

Other income 0.4 0.7 0.4 0.2

Total revenue 85.4 80.4 73.7 71.3

Operating expenses:

Loss and loss adjustment expenses 96.7 95.7 80.9 77.7

Sales and marketing 15.3 21.4 8.1 3.2

Other insurance expense (benefit) 1.0 ( 7.8 ) 1.1 ( 2.3 )

Technology and development 13.9 17.9 14.3 9.4

General and administrative 30.5 39.5 26.4 31.0

Total operating expenses 157.4 166.7 130.8 119.0

Operating loss ( 72.0 ) ( 86.3 ) ( 57.1 ) ( 47.7 )

Interest expense ( 5.5 ) ( 9.2 ) ( 9.3 ) ( 10.6 )

Loss before income tax expense ( 77.5 ) ( 95.5 ) ( 66.4 ) ( 58.3 )

Income tax expense — — — —

Net loss ( 77.5 ) ( 95.5 ) ( 66.4 ) ( 58.3 )

Other comprehensive loss:

Changes in net unrealizes (losses) gains on investments ( 3.7 ) ( 1.3 ) ( 2.3 ) 1.1

Comprehensive loss $ ( 81.2 ) $ ( 96.8 ) $ ( 68.7 ) $ ( 57.2 )

Loss per common share:

basic and diluted (both Class A and B) (1)

$ ( 5.54 ) $ ( 6.77 ) $ ( 4.71 ) $ ( 4.13 )

Weighted-average common shares outstanding:

basic and diluted (both Class A and B) (1)

14.0 14.1 14.1 14.1

______________

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

and CARET HOLDINGS, INC.

5 unchanged sentences

Cash and cash equivalents

432.3 1,043.1

Restricted cash

10 unchanged sentences

Commitments and Contingencies

Redeemable convertible preferred stock, $ 0.0001 par value, 14.1 shares issued and outstanding at December 31, 2022 and December 31, 2021 (liquidation preference of $ 126.5 )

Stockholders’ equity:

1 unchanged sentence

Class B common stock, $ 0.0001 par value, 5.0 and 6.1 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively (1)

Treasury stock, at cost

Additional paid-in capital

3 unchanged sentences

Total stockholders’ equity

536.4 1,032.4

Total liabilities, redeemable convertible preferred stock and stockholders’ equity

$ 723.7 $ 749.1

______________

(1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022.

Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.”

See Notes to Condensed Combined Financial Statements

6 unchanged sentences

Net investment income $ 4.5 $ 4.6 $ 0.9

Net realized gains on investments 1.2 — —

Total revenue 5.7 4.6 0.9

24 unchanged sentences

Cash flows from operating activities:

Net cash provided by (used in) operating activities

$ 205.9 $ ( 257.1 ) $ ( 62.9 )

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

Depreciation and amortization, net 13.1 11.8 3.5

Change in equity in subsidiaries 429.1 228.9 242.5

Loss on early extinguishment of debt

SAFE fair value adjustment — — 11.2

Warrants fair value adjustment — 54.7 —

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:

Other assets 4.2 ( 15.5 ) ( 1.2 )

Accounts payable and accrued expenses 0.4 3.8 4.9

Other liabilities ( 3.5 ) 2.1 0.6

Intercompany, net ( 209.6 ) ( 23.6 ) ( 7.2 )

Net cash used in operating activities ( 257.1 ) ( 62.9 ) ( 17.3 )

Cash flows from investing activities:

Purchases of investments — ( 0.4 ) ( 0.5 )

Proceeds from maturities, call and pay downs of fixed maturities available-for-sale

Sales of investments

Purchases of indefinite-lived intangible assets and transaction costs ( 1.3 ) — —

Capitalization of internally developed software ( 8.8 ) ( 6.6 ) ( 5.4 )

6 unchanged sentences

Proceeds from issuance of preferred stock and related warrants

126.5 — 349.6

Payment of preferred stock and related warrants issuance costs

( 3.0 ) ( 10.5 ) —

Proceeds from debt and warrants issuance, net of issuance cost 286.0 — 12.0

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

Proceeds from SAFE — — 10.0

Purchases of treasury stock — — ( 0.2 )

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities

283.3 ( 80.3 ) 1,098.5

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

119.5 ( 610.8 ) 826.0

16 unchanged sentences

Actual results could differ from those estimates.

Reverse Stock Split — In August 2022, an authorized subcommittee of our board of directors approved a reverse stock split of our Class A and Class B common stock at a ratio of 1-for-18.

On August 12, 2022, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to effect a 1-for-18 reverse stock split of our Class A and Class B common stock.

As a result of the reverse stock split, every 18 shares of our issued or outstanding pre-reverse split common stock of each class were combined into one share of common stock of such class.

No fractional shares were issued upon the reverse stock split.

On August 15, 2022, our Class A common stock began trading on a split-adjusted basis on the Nasdaq Stock Market.

In connection with the reverse stock split, there was no change to the shares authorized or in the par value per share of $ 0.0001 .

In addition, there was no change to the number of shares issued or outstanding for our Series A Preferred Stock.

Statement of Cash Flows —The supplemental disclosures for cash and non-cash flows for the years ended December 31, 2022, 2021 and 2020 are as follows:

5 unchanged sentences

Leasehold improvements - non-cash 0.9 1.5 —

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

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

7 unchanged sentences

Restricted cash 1.0 1.0

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

Total cash, cash equivalents and restricted cash shown in the condensed combined statements of cash flows

$ 552.8 $ 433.3

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.

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.

1 unchanged sentence

The guarantee remains in effect until such time as the Superintendent may release Root, Inc.

Subsequent Events