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Item 9A. Controls and Procedures

2024-02-21 compared with 2023-02-22 · 52 added, 74 removed, 180 unchanged (41% of the section changed)

Controls and Procedures

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.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered in this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).

Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2023.

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.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is 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.

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.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2023, our internal control over financial reporting was effective.

Deloitte & Touche LLP, an independent registered public accounting firm, has audited the consolidated financial statements contained in this Annual Report on Form 10-K, and has issued an attestation report on the effectiveness of our internal controls over financial reporting, which is included below.

Changes in Internal Control over Financial Reporting

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “preceding Form 10-K”), management concluded that there was a material weakness in internal controls over financial reporting related to monitoring and the control environment, including the circumvention of control activities, that contributed to the fraud perpetrated by a former senior marketing employee, and aggregated to a material weakness.

Specifically, the material weakness related 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.

We have taken the following steps to remediate the material weakness described above:

• Enhanced our policy to require more comprehensive hiring practices for individuals in senior leadership positions, which includes more robust background checks than we require for all other employees.

• Improved the design of internal vendor management processes and controls, including hiring dedicated procurement resources to ensure contracts, including amendments, are appropriately reviewed, authorized in accordance with our delegation of authority policies, and approved.

• Clarified 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.

• Implemented more stringent monitoring controls to ensure compliance with contract reviews, approval authority limits and vendor payment policies.

As of December 31, 2023, testing of both the design and operating effectiveness of the new controls was completed, and management concluded that the material weakness in internal controls over financial reporting related to this matter has been remediated.

Except as noted in the preceding paragraphs, there has been no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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and subsidiaries (the “Company”) as of December 31, 2023, 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.

In our opinion, the Company maintained, in all material respects effective internal control over financial reporting as of December 31, 2023, 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, 2023, of the Company and our report dated February 21, 2024, expressed an unqualified opinion on those financial statements.

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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

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;

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

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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.

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.

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.

None of the Company’s directors or officers (as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934) adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as each term is defined in Item 408 of Regulation S-K) during the Company’s fiscal quarter ended December 31, 2023.

On February 19, 2024, Matt Bonakdarpour, 37, was appointed President and Chief Technology Officer of the Company.

Bonakdarpour has been the Chief Technology Officer of the Company since February 23, 2022.

Bonakdarpour will continue to receive compensation and benefits materially similar to those described in the Company’s Definitive Proxy Statement on Schedule 14A, as filed with the SEC on April 27, 2023 (the “2023 Proxy Statement”), except that Mr.

Bonakdarpour’s target annual incentive opportunity was increased to 100% of annual base salary under the Company’s annual short-term incentive program, and in the Company’s Current Report on Form 8-K, as filed with the SEC on August 11, 2023.

The biographical information and business experience of Mr.

Bonakdarpour is also included in the 2023 Proxy Statement, and those descriptions are incorporated herein by reference.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

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This proxy statement is referred to in this report as the 2024 Proxy Statement.

We will provide disclosure of delinquent Section 16(a) reports, if any, in our Proxy Statement in a section entitled “Delinquent Section 16(a) Reports,” and such disclosure, if any, is incorporated herein by reference.

Executive Compensation

The information required by this Item is incorporated by reference to the 2023 Proxy Statement.

The information required by this Item is incorporated by reference in the 2024 Proxy Statement.

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.

The information required by this Item is incorporated by reference in the 2024 Proxy Statement.

Certain Relationships and Related Party Transactions, and Director Independence

The information required by this Item is incorporated by reference to the 2023 Proxy Statement.

The information required by this Item is incorporated by reference in the 2024 Proxy Statement.

Principal Accountant Fees and Services

The information required by this Item is incorporated by reference to the 2023 Proxy Statement.

The information required by this Item is incorporated by reference in the 2024 Proxy Statement.

Exhibits and Financial Statement Schedules.

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3.3 Amended and Restated Bylaws of Root, Inc.

10-K 001-39658 3.3 February 22, 2023

3.4 Certificate of Designations of Series A Preferred Stock, filed with the Delaware Secretary of State on October 1, 2021

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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

10.7# Offer Letter by and between Root, Inc.

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10.32*# Separation and Transition Agreement dated February 20, 2023, between Daniel Rosenthal and Root, Inc.

21.1 List of subsidiaries of Root, Inc.

10-K 001-39658 10.34 February 22, 2023

10.33# Executive Employment Agreement with Megan Binkley

8-K 001-39658 10.1 March 1, 2023

10.34# Retention Bonus Agreement between Megan Binkley and Root, Inc.

10-Q 001-39658 10.3 May 3, 2023

10.35# Non-Employee Director Compensation Policy

10-Q 001-39658 10.1 August 2, 2023

10.36# Executive Retention Agreement between Matt Bonakdarpour and Root, Inc.

dated August 9, 2023

8-K 001-39658 10.1 August 11, 2023

10.37# Performance-Based RSU Award Grant Notice

10-Q 001-39658 10.2 November 1, 2023

10.38# Root, Inc.

Non-Employee Director Compensation Policy adopted October 23, 2023

8-K 001-39658 10.1 October 26, 2023

21.1 List of subsidiaries of Root, Inc.

23.1 Consent of Deloitte & Touche LLP.

24.1 Power of Attorney (incorporated by reference to the signature pages of this Annual Report on Form 10-K).

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.

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.

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Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

97.1 Root, Inc.

Compensation Recovery Policy

101.INS Inline XBRL Instance Document

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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.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alexander Timm 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.

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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 )

/s/ Megan Binkley Chief Financial Officer

( Principal Financial Officer and Principal Accounting Officer )

February 21, 2024

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Julie Szudarek

/s/ Scott Maw Director February 22, 2023

/s/ Donna Dorsey Director February 21, 2024

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures