Root, Inc. 10-K

Item 9A. Controls and Procedures Background As described in the Current Report on Form 8-K filed on December 30, 2022, The Audit, Risk and Finance Committee (the “Audit Committee”) of our board of directors engaged outside counsel to conduct an internal investigation with respect to a series of marketing services transactions that a former senior marketing employee entered into in 2022. The internal investigation is now concluded. The results indicate that, with respect to certain vendors, these transactions involve payments from the Company of approximately $10 million, which the Company believes were subsequently transferred at such former employee’s direction and without prior disclosure to Company senior management, by those vendors to entities in which the former employee had an interest. The former employee who is accused of committing the suspected fraud is no longer employed by the Company. The suspected fraud was discovered by the Company in the weeks following the former employee’s termination on November 9, 2022. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered in this Annual Report on Form 10-K. Based on the evaluation of these disclosure controls and procedures, because of the material weakness described below, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2022. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Under the supervision of our principal executive officer and principal financial officer, we conducted our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, using the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on the evaluation under these criteria and because of the material weakness described below, our principal executive officer and principal financial officer concluded that we did not maintain effective internal control over financial reporting as of December 31, 2022. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of December 31, 2022, we determined that there were control deficiencies related to monitoring and the control environment, including the circumvention of control activities, that contributed to the suspected fraud perpetrated by a former senior marketing employee, and aggregated to a material weakness. Specifically, the material weakness relates to inadequate hiring practices for employees in senior leadership positions whose roles and responsibilities include the initiation of transactions with third parties; and ineffective control and monitoring activities, including the circumvention of certain control activities, related to the review, authorization and approval of third-party vendors, and associated contracts for services, and approval of third-party vendor payments. 135 Remediation Activities : We intend to remedy our material weakness described above by: • Enhancing our policy to require more comprehensive hiring practices for individuals in senior leadership positions, which may include more robust background checks than we require for all employees. • Improving the design of internal vendor management processes and controls, including the hiring of dedicated procurement resources to ensure contracts, including amendments, are appropriately reviewed, authorized in accordance with our delegation of authority policies, and approved. • Clarifying the design of vendor payment controls to prescribe the criteria an approver must review, in addition to invoice requests, to adequately support payments to vendors. • Implementing more stringent monitoring controls to ensure compliance with contract reviews, approval authority limits and vendor payment policies. We are committed to maintaining a strong internal control environment, and believe that these remediation actions, when fully implemented, will represent significant improvements in our controls under the Internal Control – Integrated Framework issued by the COSO . Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection w ith our evaluation of internal control over financial reporting. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. Deloitte & Touche LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2022, which is included below. Changes in Internal Control Except for the identification of the material weakness described above, there were no changes during the quarter ended December 31, 2022 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 136 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Root, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Root, Inc. and subsidiaries (the “Company”) 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 (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 22, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Material Weakness A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim 137 financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: Inadequate hiring practices for employees in senior leadership positions whose roles and responsibilities include the initiation of transactions with third parties; and ineffective control and monitoring activities, including the circumvention of certain control activities, related to the review, authorization and approval of third-party vendors, and associated contracts for services, and approval of third-party vendor payments. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2022, of the Company, and this report does not affect our report on such financial statements. /s/ DELOITTE & TOUCHE LLP Columbus, Ohio February 22, 2023 138 Item 9B. Other Information On February 15, 2023, our board of directors amended and restated the Company's bylaws to, among other things, (1) revise procedures and disclosure requirements for the nomination of directors and the submission of proposals for consideration at meetings of the Company’s stockholders, including, adding a requirement that a stockholder seeking to nominate director(s) at an annual meeting deliver to the Company reasonable evidence that it has complied with the requirements of Rule 14a-19 of the Securities Exchange Act of 1934, as amended, (2) implement majority voting in uncontested elections of directors, (3) reserve a white card for the Company's use in proxy contests, and (4) make certain administrative, modernizing, clarifying, and conforming changes. The foregoing summary is qualified in its entirety by reference to the full text of the Amended and Restated Bylaws, filed as Exhibit 3.3 to this Annual Report on Form 10-K, and incorporated by reference herein. On February 20, 2023, Scott Maw informed Root, Inc. (the "Company") of his intention to resign from the Company's board of directors, and its Audit, Risk and Finance Committee on which he serves as a member, effective February 28, 2023. Mr. Maw’s resignation was not related to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. On February 20, 2023, Daniel Rosenthal, the Company’s Chief Revenue and Operating Officer, informed the Company of his plan to resign as an executive officer of the Company effective March 23, 2023, and from the Company’s board of directors effective immediately. To ensure a smooth transition of his responsibilities, the Company and Mr. Rosenthal entered into a Separation and Transition Agreement dated February 20, 2023 (the “Transition Agreement”), pursuant to which Mr. Rosenthal will provide transitional services as respects certain in-process projects. Pursuant to the Transition Agreement, and subject to continued compliance with the terms thereof, Mr. Rosenthal will be entitled to the following through March 23, 2023: regular base salary; standard employee benefits; continued vesting and settlement of outstanding equity awards pursuant to their terms; and 2022 annual bonus in the amount of $750,000 to be paid in early 2023 in the normal course. In addition, pursuant to the Transition Agreement, provided Mr. Rosenthal timely elects continued coverage, the Company will pay the Company share of COBRA premiums for Mr. Rosenthal and his covered dependents, until December 31, 2023, or until such earlier date as further described in the Transition Agreement. He will not be eligible for any equity grants from the Company during calendar year 2023 or thereafter and will forfeit all unvested equity and other awards. The Transition Agreement contains customary restrictions and business protection provisions. Mr. Rosenthal’s receipt of the payments and benefits under the Transition Agreement is contingent upon Mr. Rosenthal’s provision of a full release of claims, as well as expiration of the statutory revocation period without the Transition Agreement and the release being revoked. The foregoing description of the Transition Agreement is qualified in its entirety by reference to the full text of the Transition Agreement, a copy of which is filed as Exhibit 10.34 to this Annual Report on Form 10-K and incorporated by reference herein. 139 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 140 PART III. Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated by reference in the definitive proxy statement for our Annual Meeting of Stockholders to be held on or about June 6, 2023. This proxy statement is referred to in this report as the 2023 Proxy Statement. 141 Item 11. Executive Compensation The information required by this Item is incorporated by reference to the 2023 Proxy Statement. 142 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated by reference to the 2023 Proxy Statement. 143 Item 13. Certain Relationships and Related Party Transactions, and Director Independence The information required by this Item is incorporated by reference to the 2023 Proxy Statement. 144 Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated by reference to the 2023 Proxy Statement. 145 PART IV. Item 15. Exhibits and Financial Statement Schedules. (a) Exhibits. Exhibit Number Description of Exhibit Form SEC File Number Exhibit Filing Date Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of Root, Inc. 8-K 001-39568 3.1 October 30, 2020 3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Root, Inc. 8-K 001-39658 3.1 August 15, 2022 3.3 Amended and Restated Bylaws of Root, Inc. X 3.4 Certificate of Designations of Series A Preferred Stock, filed with the Delaware Secretary of State on October 1, 2021 8-K 001-39658 3.1 October 1, 2021 4.1 Form of Class A common stock certificate. S-1/A 333-249332 4.1 October 20, 2020 4.2 Description of Securities . X 4.3 Common Stock Purchase Warrants, dated as of October 1, 2021, by and between Root, Inc. and Carvana Group, LLC 8-K 001-39658 4.1 October 1, 2021 4.4 Form of Common Stock Purchase Warrant (Tranche 1), dated January 26, 2022 8-K 001-39658 4.1 January 27, 2022 4.5 Form of Common Stock Purchase Warrant (Tranche 2) 8-K 001-39658 4.2 January 27, 2022 10.1# Root, Inc. 2020 Employee Stock Purchase Plan. S-8 333-256076 99.2 May 13, 2021 10.2# First Amendment to 2020 Employee Stock Purchase Plan 10-Q 001-39658 10.1 November 9, 2022 10.3# Root, Inc. 2020 Equity Incentive Plan. 10-Q 001-39658 10.1 December 2, 2020 10.4# First Amendment to 2020 Equity Incentive Plan 10-Q 001-39658 10.2 November 9, 2022 10.6# Root, Inc. Amended and Restated 2015 Equity Incentive Plan. S-1 333-249332 10.1 October 5, 2020 10.7# First Amendment to 2015 Amended and Restated Equity Incentive Plan 10-Q 001-39658 10.3 November 9, 2022 10.8# Executive Employment Agreement by and between Caret Holdings, Inc. and Hemal Shah, dated December 16, 2021 10-K 001-39658 10.2 February 23, 2022 10.9# Offer Letter by and between Root, Inc. and Alexander Timm, dated January 4, 2021. 10-K 001-39658 10.16 March 4, 2021 10.10# Amended and Restated Offer Letter by and between Root, Inc. and Daniel Rosenthal, dated February 24, 2021. 10-K 001-39658 10.17 March 4, 2021 10.11# First Amendment to Amended and Restated Offer Letter by and between Root, Inc. and Daniel Rosenthal, dated February 23, 2022 10-K 001-39658 10.27 February 23, 2022 146 10.12# First Amendment to Offer Letter by and between Root, Inc. and Alexander Timm, dated February 22, 2022 10-K 001-39658 10.26 February 23, 2022 10.13# Executive Employment Agreement with Robert Bateman 8-K 001-39658 10.1 March 23, 2022 10.14# Executive Employment Agreement with Matt Bonakdarpour 10-Q 001-39658 10.2 August 8, 2022 10.15# Form of Executive Retention Award 10-K 001-39658 10.3 February 23, 2022 10.16# Root Inc, Non-Employee Director Compensation Policy adopted February 17, 2022 10-K 001-39658 10.4 February 23, 2022 10.17# Form of Stock Option Agreement under the Amended and Restated 2015 Equity Incentive Plan. S-1 333-249332 10.2 October 5, 2020 10.18# Form of Notice of Stock Option Exercise and Stock Option Exercise Agreement under the Amended and Restated 2015 Equity Incentive Plan. 10-K 001-39658 10.7 March 4, 2021 10.19# Form of Root, Inc. 2020 Equity Incentive Plan RSU Award Grant Notice and Award Agreement 10-Q 001-39658 10.2 May 6, 2021 10.20# Form of Root, Inc. 2020 Equity Incentive Plan Stock Option Grant Notice and Option Agreement 10-Q 001-39658 10.1 August 12, 2021 10.21# Form of Director and Officer Indemnity Agreement 10-K 001-39658 10.22 February 23, 2022 10.22# Form of RSU Agreement under the Amended and Restated 2015 Equity Incentive Plan. S-1 333-249332 10.4 October 5, 2020 10.23* Term Loan Agreement, dated as of January 26, 2022, by and among the Company, Caret Holdings, Inc., as borrower, the loan parties party thereto and Acquiom Agency Services LLC, as the administrative agent for the lenders party thereto 10-Q 001-39658 10.1 May 4, 2022 10.24* Commercial Agreement, dated as of October 1, 2021 8-K 001-39658 10.1 October 1, 2021 10.25* First Amendment to Carvana Commercial Agreement, dated as of May 13, 2022 10-Q 001-39658 10.3 August 8, 2022 10.26# Root, Inc. Executive Compensation Agreement 10-K 001-39658 10.30 February 23, 2022 10.27# Form of Root, Inc. Cash Incentive Agreement 10-Q 001-39658 10.9 May 4, 2022 10.28 Investment Agreement, dated as of August 11, 2021, by and between Root, Inc. and Carvana Group, LLC 8-K 001-39658 10.1 August 12, 2021 10.29 First Amendment to Investment Agreement, dated as of September 29, 2021, by and between Root, Inc. and Carvana Group, LLC 8-K 001-39658 10.3 October 1, 2021 10.30 Fifth Amended and Restated Investors’ Rights Agreement by and among Root, Inc. and certain of its stockholders, dated November 25, 2019. S-1 333-249332 4.2 October 5, 2020 147 10.31 Amendment to the Fifth Amended and Restated Investors’ Rights Agreement by and among Root, Inc. and certain of its stockholders, dated October 28, 2020 10-K 001-39658 10.5 February 23, 2022 10.32 Board Observation Side Letter, dated January 26, 2022, by and between the Company and GCO II Aggregator 2 L.P. 8-K 001-39658 10.2 January 27, 2022 10.33 Registration Rights Agreement, dated January 26, 2022, by and between the Company and the other parties thereto. 8-K 001-39658 10.3 January 27, 2022 10.34*# Separation and Transition Agreement dated February 20, 2023, between Daniel Rosenthal and Root, Inc. X 21.1 List of subsidiaries of Root, Inc. 10-K 001-39658 21.1 February 23, 2022 23.1 Consent of Deloitte & Touche LLP. X 24.1 Power of Attorney (incorporated by reference to the signature pages of this Annual Report on Form 10-K). X 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbane s -Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1† Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). _______________ * Schedules and exhibits to this Exhibit omitted pursuant to Regulation S-K Item 601(a)(5) and (b)(10). The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. # Indicates management contract or compensatory plan. † The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates them by reference. 148 Item 16. Form 10-K Summary None. 149 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . Date: February 22, 2023 ROOT, INC. By: /s/Alexander Timm Alexander Timm Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alexander Timm, Robert Bateman and Megan Binkley, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Alexander Timm Chief Executive Officer and Director ( Principal Executive Officer ) February 22, 2023 Alexander Timm /s/ Robert Bateman Chief Financial Officer and Treasurer ( Principal Financial Officer ) February 22, 2023 Robert Bateman /s/ Megan Binkley Deputy Chief Financial Officer ( Principal Accounting Officer ) February 22, 2023 Megan Binkley /s/ Doug Ulman Director February 22, 2023 Doug Ulman /s/ Jerri DeVard Director February 22, 2023 Jerri DeVard /s/ Larry Hilsheimer Director February 22, 2023 Larry Hilsheimer /s/ Beth Birnbaum Director February 22, 2023 Beth Birnbaum /s/ Nancy Kramer Director February 22, 2023 Nancy Kramer /s/ Julie Szudarek Director February 22, 2023 Julie Szudarek /s/ Scott Maw Director February 22, 2023 Scott Maw